inflation - causes and cures

Question 1

what is the definition of money ?

Answer 1

anything which is generally accepted in exchange for goods and services and in the settlement of debt

Question 2

What is the medium of exchange ?

Answer 2

An instrument that is accepted in exchange for goods and services

Question 3

What is store of value ?

Answer 3

An instrument ehich allows people to defer purchasing poer to the future

Question 4

What is a unit of account ?

Answer 4

An instrument that allows us to measure the values of different goods and services

Question 5

What is the monetarist view of money summarised by ?

Answer 5

Inflation is always and everywhere a monetary phenomenon in the sense thst it can be produced only by a more rapid increase in the quantity of of money

Question 6

What is the traditional quantity theory of money ?

Answer 6

MV = PY

Question 7

What does M stand for ?

Answer 7

Nominal money supply

Question 8

What does V stand for ?

Answer 8

The income velocity of circulation of money during a given time period

Question 9

What does P stand for ?

Answer 9

The average price of final output

Question 10

What does Y stand for ?

Answer 10

The real quantity of final output produced during a given time period

Question 11

What does narrow money mean?

Answer 11

Notes and coins in circulation plus reserve balances held by banks at the central bank

Question 12

What does broad money mean ?

Answer 12

notes and coins plus a range of deposits held by individuals, firms and other organisations in banks and similar financial institutions

Question 13

What does reserve requirements mean?

Answer 13

the minimum amount of reserves banks must hold against deposits

Question 14

What does open market operations mean

Answer 14

The purchase and sale of government bonds by the central bank

Question 15

What does base rate mean ?

Answer 15

The interest rate on loan the bank of england makes to the banking sector

Question 16

What is the modern quantity theory of money ?

Answer 16

P = M - Y

Question 17

What does the modern quantity theory of money mean ?

Answer 17

The policy means that the authorities should seek to control the rate of growth of the money supply in line with the underlying rate of growth of real output in order to ensure long-term price stability

Question 18

What does the traditional quantity theory of money meN ?

Answer 18

the authorities controlled the nominal supply of money in the economy
the income velocity of money depended on institutional factors - e.g. the length of the payments period. It was also thought to be constant
The level of real output was determines by real forces such as the supply of factors of production.
Output would return to full employment in the long run .
Y would be constant at the full employment level of output

Question 19

What is the Phillip’s curve ?

Answer 19

This depicts the relationship between the inflation rate and the unemployment rate

Question 20

What did the Phillip’s curve clarify ?

Answer 20

there was a stable relationship between unemployment and money wages.
The estimated average relationship indicated that when the level of unemployment was approx. 5.5 %, the rate of change of money wages was 0.
Also, at an unemployment level of approx. 2.5%m the rate of change of money wages was approx. 2% which was roughly = to the then average growth of productivity.
A 2.5 % level of unemployment was compatible with price stability

Question 21

hypothesis of phillip’s curve ?

Answer 21

1. the rate of increase in money wages depends positively on excess demand for labour
2. excess demand for labour and unemployment are negatively related provided the economic rationale for the phillips curve

Question 22

what is the equation to describe the phillip’s curve

Answer 22

W = f(U)

w = rate of change of money wages
U = unemployment

Question 23

What was the Phillip’s curve part of in the 1960s ?

Answer 23

The keynesian orthodox

Question 24

A lower rate of unemployment equals …

Answer 24

a higher rate of inflation

Question 25

What theory was adhered to by keynesians ?

Answer 25

Demand - pull inflation

Question 26

What is demand pull inflation

Answer 26

Inflation caused by an excess demand for goods and services when the economy is at or above, full employment

Question 27

When the original Phillip’s curve was broken down, what theory did the Keynesians turn to instead of demand pull theory ?

Answer 27

Cost-push inflation

Question 28

What is cost push inflation ?

Answer 28

Inflation caused by cost increases even though there are no shortages of goods and services and the economy is below full employment

Question 29

What is real wage?

Answer 29

The money wage divided by the price index

Question 30

What is a short run Phillip’s curve ?

Answer 30

Depicts the relationship between inflation and unemployment that exists for a given expected rate of inflation

Question 31

What are the assumptions based on the expectations-augmented phillip’s curve ?

Answer 31

1. Productivity growth remains constant at zero with the result that firms will pass on any wage increases in the form of price increases in order to maintain their profit margins
2. the short run phillip’s curve

Question 32

What is the equation for expectations-augmented Phillip’s curve ?

Answer 32

W = f(U) + Pe

W = rate of change of money wages
u = unemployment
pe.= the expected rate of inflation

Question 33

What does disinflation mean ?

Answer 33

A decrease in the rate of inflation

Question 34

What does cold turkey mean ?

Answer 34

A rapid and permanent reduction in the rate of monetary growth aimed at reducing the rate of inflation

Question 35

What does gradualism mean ?

Answer 35

An approach to disinflation that involves a slow and gradual reduction in the rate of monetary growth

Question 36

What is the prices and incomes policy ?

Answer 36

Measures that establish guidelines or controls for wage and /or price increases

Question 37

what does credibility mean ?

Answer 37

the degree to which people believe the authorities announcements about future policy

Question 38

What does a fixed exchange rate mean ?

Answer 38

An exchange rate that is fixed at a predetermined level by intervention by the country’s central bank in the foreign exchange market

Question 39

What is a Bretton Woods system?

Answer 39

a fixed exchange rate system established at the end of the Second World War. The system broke down in the early 1970s

Question 40

What is a flexible exchange rate ?

Answer 40

An exchange rate that is determined in the foreign exchange market by the forces of demand and supply ; also known as a floating exchange rate

Question 41

What is the non-monetarist view ?

Answer 41

It initiates the force of inflation.

Question 42

Examples of non-monetarist view ?

Answer 42

1. class conflict is inevitable in a capitalist society, inflation results from the struggle between workers and capitalists as each group strives to achieve a bigger share of national income
The more workers aspirations for real income growth exceed productivity growth, the faster will be the ensuin inflation. 
2. inflation results from the attempts of uniions to improve or maintain their members position in the league table of wages. Trade unions result in an inflationary wage-prive spiral