Inflation, Unemployment, Business Cycle

Question 1

Inflation

Answer 1

-inflation is a persistent and appreciable rise in the general level of prices
-price rises noticeably across a range of goods and services
-to some economies inflation is normal and a important indicator (1/3) of the economic ‘health’
-measured by CPI

Question 2

Compiling CPI

Answer 2

-not all price changes are measured-> only based on a sample of goods and services purchased by typical households called a basket
-basket is weighted to indicate importance
-HIGH weighting: fuel, food, rent, alcohol+tobacco
-LOW weighting: subscriptions, luxury clothes

Question 3

Headline / underlying

Answer 3

-CPI is a broad all groups measure -> headline
-CPI manipulated to be more accurate -> underlying

Question 4

Underlying measures CPI

Answer 4

-trimmed mean and weighted median
-reduces impact of items with volatile prices

Question 5

Demand pull inflation

Answer 5

Explains why prices can increase when there are higher levels of demand ‘too much demand chasing too few goods.’
-often associated with a strong economy during the late expansion phase of the business cycle
-indicators: High wages, consumer confidence + use of credit

Question 6

Cost push inflation

Answer 6

Explains why prices can increase when rising input prices are passed through to consumer prices
-occurs all phases of business cycle, depends on global markets
-e.g rising fuel and oil prices

Question 7

Effects of inflation

Answer 7

-real interest rates
-depreciation
-hyper inflation

Question 8

Labour force

Answer 8

People within working age who are working / looking for work
-unemployment rate based on how many in labour force are unemployed

Question 9

Participation rate

Answer 9

The proportion of the working age population that is in the labour force
-labour force/population aged 15+

Question 10

Unemployment rate

Answer 10

The proportion of the labour force that is willing and able to work but had not held paid work for at least one hour per week
-unemployed / labour force

Question 11

Underemployment

Answer 11

Refers to workers who have a paid job but would like to work more hours or are significantly over qualified for their field of work

Question 12

Frictional unemployment

Answer 12

-voluntary
-people ;eating for better pay, for a different location, due to a changed family circumstance etc.

Question 13

Structural unemployment

Answer 13

-changes in economy
-involuntary
-changed demand for knowledge and skills e.g many people being qualified auto workers however that job is no longer relevant to todays society

Question 14

Cyclical unemployment

Answer 14

-involuntary
-follows business cycle
-grows and shrinks because demand o labour is derived from demand of goods and services
-building, retailing, hospitality

Question 15

Unemployment social costs

Answer 15

-self esteem
-connections to community through work
-costs centre on personal and families life

Question 16

Relationship between inflation and unemployment

Answer 16

-negative relationship (Phillips curve)
-as econ activity rises, lower cyclical unemployment puts upward pressure and wages, passed on to cosumer prices
-more people with jobs means more spending power so prices get bud upwards

Question 17

The business cycle

Answer 17

Shows the fluctuation in economic activity that an economy experiences over a period of time
-refers to the fluctuations of real GDP around the long term growth rate.

Question 18

Upswing/expansion features

Answer 18

-high consumption expenditure
-general confidence amongst investors
-business firms are working toward full capacity
-cyclical unemployment relatively low
-inflationary pressures
-imports increase low saving levels
-increasing levels of borrowing
-living standards increasing

Question 19

Downswing/ contraction features

Answer 19

-low levels consumption expenditure
-low confidence amongst investors
-business firms working at lower capacity
-cyclical unemployment high and increasing
-deflationary pressure
-imports low
-low levels of borrowing

Question 20

Peak features

Answer 20

-weakening confidence amongst investors
-business firms are working at full capacity
-unemployment is lower than natural rate
-unsustainably high levels of econ activity

Question 21

Trough features

Answer 21

-growing confidence amongst investors
-business firms working at lowest capacity
-unemployment at its highest
-prices likely to stabilise/begin rising

Question 22

Leading indicators

Answer 22

-share prices
-building approvals
-business + consumer confidence
-consumer expectations

Question 23

Coincident indicators

Answer 23

-GDP
-retail sales
-job advertisements

Question 24

Lagging indicators

Answer 24

-interest rates
-unemployment
-bankruptcies
-inflation

Question 25

Counter cyclical

Answer 25

-government spending is counter cyclical (aims to smooth economic cycle)

Question 26

Negative shocks that spark a recession

Answer 26

-imternational supply chain disruptions (COVID)
-natural disasters (floods QLD)
-political events (Ukraine v Russia)
-health crises (COVID)

Question 27

Positive shocks that spark a recovery

Answer 27

-large gov stimulus (job keeper/seeker payments)
-unexpected growth in a major trade partner (Aus signs ECTA 2022)

Question 28

End of mining boom 2019

Answer 28

-strong GDP growth last 10+ years
-high levels investment into mining sector, growing exports if commodities (iron ore, coal, liquified natural gas (LNG)
-decreased investment levels
-decreased exports as China growth slowed
-weather events (floods/fires) decreased supply

Question 29

End of mining boom 2019

Answer 29

-strong GDP growth last 10+ years
-high levels investment into mining sector, growing exports if commodities (iron ore, coal, liquified natural gas (LNG)
-decreased investment levels
-decreased exports as China growth slowed
-weather events (floods/fires) decreased supply

Question 30

Covid-19 recession 2020

Answer 30

-GDP decreased 7% in the June quarter of 2020, largest decline in Aus history
-businesses unable to operate, consumers unable to spend, large decrease in investments, large decrease in net exports

Question 31

Covid-19 rapid recovery 2021-2024

Answer 31

-significant + rapid increase in GDP growth
-large injections of gov spending, high consumer expenditure, increased exports
-jobseeker + keeper programs injected 89 billion into economy
-supply issues, high input prices + high spending levels causing extremely high inflation

Question 32

Current trends in the business cycle

Answer 32

-currently in an expansion, potentially a peak as GDP is below the target level (1.1 % in March 2024)
-GDP growth mainly from gov spending which also indicates a peak phase

Question 33

Current indicators

Answer 33

Leading =
-share prices down (0.5 %)
-building approvals decreasing (-7.0%)
Coincidental =
-GDP slowing (1.1%)
-CPI increasing (4%)
Lagging =
-unemployment is constant

Question 34

Trends in Aus unemployment (last 5 years)

Answer 34

-since COVID-19 recession recovery, inflation has been to high meaning gov wants to slow economy to slow inflation by increasing inflation rates
-becomes more expensive to borrow money so business costs increase, people mortgages etc. increase in cost so spending is low, leading to people being laid off work

-increasing trend in overall participation rate (despite big decrease during COVID)
-increased participation leads to econ growth

-GDP increasing but the maximum potential output also increased so there will still be a GDP gap

-decreasing trend in underutilisation
-econ growth
-GDP gap will narrow because we are using more of our labour resources but total labour hasn’t changed