inflation - causes and cures Flashcards
what is the definition of money ?
anything which is generally accepted in exchange for goods and services and in the settlement of debt
What is the medium of exchange ?
An instrument that is accepted in exchange for goods and services
What is store of value ?
An instrument ehich allows people to defer purchasing poer to the future
What is a unit of account ?
An instrument that allows us to measure the values of different goods and services
What is the monetarist view of money summarised by ?
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
What is the traditional quantity theory of money ?
MV = PY
What does M stand for ?
Nominal money supply
What does V stand for ?
The income velocity of circulation of money during a given time period
What does P stand for ?
The average price of final output
What does Y stand for ?
The real quantity of final output produced during a given time period
What does narrow money mean?
Notes and coins in circulation plus reserve balances held by banks at the central bank
What does broad money mean ?
notes and coins plus a range of deposits held by individuals, firms and other organisations in banks and similar financial institutions
What does reserve requirements mean?
the minimum amount of reserves banks must hold against deposits
What does open market operations mean
The purchase and sale of government bonds by the central bank
What does base rate mean ?
The interest rate on loan the bank of england makes to the banking sector
What is the modern quantity theory of money ?
P = M - Y
What does the modern quantity theory of money mean ?
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
What does the traditional quantity theory of money meN ?
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
What is the Phillip’s curve ?
This depicts the relationship between the inflation rate and the unemployment rate
What did the Phillip’s curve clarify ?
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
hypothesis of phillip’s curve ?
- the rate of increase in money wages depends positively on excess demand for labour
- excess demand for labour and unemployment are negatively related provided the economic rationale for the phillips curve
what is the equation to describe the phillip’s curve
W = f(U)
w = rate of change of money wages U = unemployment
What was the Phillip’s curve part of in the 1960s ?
The keynesian orthodox
A lower rate of unemployment equals …
a higher rate of inflation
What theory was adhered to by keynesians ?
Demand - pull inflation
What is demand pull inflation
Inflation caused by an excess demand for goods and services when the economy is at or above, full employment
When the original Phillip’s curve was broken down, what theory did the Keynesians turn to instead of demand pull theory ?
Cost-push inflation
What is cost push inflation ?
Inflation caused by cost increases even though there are no shortages of goods and services and the economy is below full employment
What is real wage?
The money wage divided by the price index
What is a short run Phillip’s curve ?
Depicts the relationship between inflation and unemployment that exists for a given expected rate of inflation
What are the assumptions based on the expectations-augmented phillip’s curve ?
- 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
- the short run phillip’s curve
What is the equation for expectations-augmented Phillip’s curve ?
W = f(U) + Pe
W = rate of change of money wages u = unemployment pe.= the expected rate of inflation
What does disinflation mean ?
A decrease in the rate of inflation
What does cold turkey mean ?
A rapid and permanent reduction in the rate of monetary growth aimed at reducing the rate of inflation
What does gradualism mean ?
An approach to disinflation that involves a slow and gradual reduction in the rate of monetary growth
What is the prices and incomes policy ?
Measures that establish guidelines or controls for wage and /or price increases
what does credibility mean ?
the degree to which people believe the authorities announcements about future policy
What does a fixed exchange rate mean ?
An exchange rate that is fixed at a predetermined level by intervention by the country’s central bank in the foreign exchange market
What is a Bretton Woods system?
a fixed exchange rate system established at the end of the Second World War. The system broke down in the early 1970s
What is a flexible exchange rate ?
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
What is the non-monetarist view ?
It initiates the force of inflation.
Examples of non-monetarist view ?
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
