Inflation and unemployment and growth

Question 1

Headline inflation

Answer 1

Is a measure of total inflation within an economy including commodities such as food and energy prices (eg. Oil and gas), which tend to be much more volatile and prone to inflationary spikes- the CPI

Question 2

Underlying inflation

Answer 2

Measures the rate of inflation after removing the effect of market forces (supply and demand). This is a more accurate measure because it removes seasonality from inflation.

Question 3

The goldilocks effect

Answer 3

The reserve bank of Australia’s inflation target is between 2-3% (just right). Prices aren’t rising too fast for the economy to keep up whilst the economy is still expanding

Question 4

Inflation

Answer 4

Rise in the average price level over time

Question 5

Disinflation

Answer 5

The slowdown in the rate in inflation. Price level still increasing but at a lower rate

Question 6

Deflation

Answer 6

Fall in the average price level over time

Question 7

Hyper-inflation

Answer 7

Inflation ‘out of control’- over 100% a year

Question 8

Why is declining inflation bad?

Answer 8

• Consumers put off purchases, decreasing demand, as they expect them to be cheaper in the future
• Tends to contribute to a low cash rate (the current situation)- investment is discouraged as low interests rates=low rates on return
• Encourages “mattress principle” take money from names and keep it to themselves
• Austerity- leads to spending cuts on social programs

Question 9

Costs of inflation

Answer 9

• money loses value, people lose faith in money, savings is reduced
• inflation can get out of control (wage price spiral)
• consumers on fixed incomes lose out (pensioners)
• favours borrowers at the expense of savers- inflation erodes the real value of existing debts
• discourages capital investment (planned investment)
• rising inflation reduces economic growth

Question 10

Benefits of inflation

In Goldilocks zone

Answer 10

• industry wide price rises enables revenues to grow
• increased revenue=higher profits
• inflation makes using debt as a source of finance cheaper in real terms

Question 11

What factors effects Australia’s inflation

Answer 11

Growth in key trading partners (India, China, other Asian countries)
Value of exchange rate
Wage rates
Competition
Govt regulation (causes prices to rise)
Indirect taxes (carbon tax) increases prices

Question 12

Unemployment

Answer 12

Occurs when people who are willing and able to work can not find a job

Rate: Calculated by ABS interviewing 2/3 of 1% oh households, all those people living in a dwelling, limited as sample size is limited therefore rate can vary
Unemployment/labour force *100

Question 13

Full employment

Answer 13

Employable people who want to work have jobs

Doesn’t mean 0% unemployment, now this is 5-6% unemployment, employability is difficult due to changes in technology and higher levels of skills and knowledge demanded

Is not a constant figure but shifts with changes in the economy

Question 14

Natural rate of unemployment

Answer 14

Determined by structural changes in the economy

Question 15

Underemployment

Answer 15

Can occur as someone educated but working in a field in which their skills are not used adequately, or when someone is employed on a part time basis but desires full time work

Question 16

Participation rate

Answer 16

Reps the proportion of Australians over 15 who are a member of the labour force (either employed (1+ hr paid or unpaid 15+hrs in a family business in a week) or unemployed (actively sought work and were willing and able to start but unable))

Total # in labour force/total # in population (15+) multiplied by 100

Rising participation rate= increased supply of labour force. If occurs at the same time as falling unemployment rates sign of stronger labour market and good job prospects

Question 17

Structural unemployment

Answer 17

Occurs due to changes in method of production for goods and services 
Generally biggest natural source 
Many changes can lead to including: 
- poor business and profit closures
- business relocation 
- new technology and mismatch of skills 
- effect of globalisation and tariff cuts
- govt and microeconomic policies

Question 18

Frictional unemployment

Answer 18

Exists when people are unemployed between finishing one job and starting another

Question 19

Seasonal unemployment

Answer 19

Results from termination of jobs at the same time each year due to regular changes in the seasons

Question 20

Cyclical unemployment 
(Demand deficient or general)

Answer 20

Follows the ups and downs of the business cycle

Question 21

Growth

Answer 21

Output=Spending=Income

Saying everything produced is consumed

Question 22

Nominal GDP
Real GDP
GDP per capita

Answer 22

Nominal- counts cost of everything produced, doesn’t account for inflation

Real- smooth out price shocks, accounts for GDP, accounts for seasonality

GDP per capita- Enables comparison (eg. To US) GDP/pop
Allows for comparison of standard of living between economies and comparison to yourself yearly