MACRO FINAL Flashcards
• Inflation, deflation, hyperinflation
Inflation is a general increase in all prices across an economy, while deflation is a general decrease in all prices across an economy. Periods of hyperinflation are characterized by very rapid increases in the price level across the economy.
• Conflict theory
“marxism today 1974, inflation is the distributional conflict between workers and capital”
early 1970’s - high inflation
*declining in productivity rate, ending the golden age
• Income share
(w * L) / Y
• Nominal prices and wages
n
Battle of the markups
Anything that affects wage formation or unemployment rates is likely to affect inflation. Thus, fixing salaries above what they would be in a competitive labour market leads to higher prices, which increases inflation and reduces real wages. In a similar fashion, an increase in unemployment benefits drives salaries above what would naturally be determined, with similar effects. In this “battle of the mark-ups” between employers and employees, the NAIRU rises.
• Cost push and demand pull inflation
Cost-push inflation is the decrease in the aggregate supply of goods and services stemming from an increase in the cost of production. Demand-pull inflation is the increase in aggregate demand, categorized by the four sections of the macroeconomy: households, business, governments, and foreign buyers.
• Wage-price or price wage inflation
The wage-price spiral suggests that rising wages increase disposable income raising the demand for goods and causing prices to rise. Rising prices increase demand for higher wages, which leads to higher production costs and further upward pressure on prices creating a conceptual spiral.
• Raw material price shocks
raw material price shocks can also trigger cost push inflation. These cost shocks may be imported (for example, an oil-dependent nation might face higher energy prices if world oil prices rise) or domestically sourced (for example, a nation may experience a drought which increases the costs of food crops and impacts on all food processing industries).
• Quantity theory of money
In monetary economics, the quantity theory of money states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply
• Equation of exchange
The equation of exchange is an economic identity that shows the relationship between money supply, the velocity of money, the price level, and an index of expenditures. English classical economist John Stuart Mill derived the equation of exchange, based on earlier ideas of David Hume. It says that the total amount of money that changes hands in the economy will always equal the total money value of the goods and services that change hands in the economy.
• Income policies
Incomes policies in economics are economy-wide wage and price controls, most commonly instituted as a response to inflation, and usually seeking to establish wages and prices below free market level. Incomes policies have often been resorted to during wartime.
• Phillips curve (short-run and long-run)
The Phillips curve is a single-equation economic model, named after William Phillips, describing an inverse relationship between rates of unemployment and corresponding rates of rises in wages that result within an economy
• Natural rate of unemployment
The natural rate of unemployment is a combination of frictional and structural unemployment that persists in an efficient, expanding economy when labor and resource markets are in equilibrium.
• Policy tradeoff with respect to the Phillips curve
Why is there a trade-off between Unemployment and Inflation?
If the economy experiences a rise in AD, it will cause increased output.
As the economy comes closer to full employment, we also experience a rise in inflation.
However, with the increase in real GDP, firms take on more workers leading to a decline in unemployment ( a fall in demand deficient unemployment)
Thus with faster economic growth in the short-term, we experience higher inflation and lower unemployment.
• Accelerationist hypothesis
The accelerationist hypothesis assumes that the price level accelerates more quickly than money wages and as a consequence the real wage falls. The Monetarists resurrected the Classical labour market and placed it at the centre of their attack on Keynesian macroeconomics.
• Adaptive expectations
In economics, adaptive expectations is a hypothesized process by which people form their expectations about what will happen in the future based on what has happened in the past. For example, if inflation has been higher than expected in the past, people would revise expectations for the future.
• Monetarism and New Classical economics
Simply put, the difference between these theories is that monetarist economics involves the control of money in the economy, while Keynesian economics involves government expenditures. Monetarists believe in controlling the supply of money that flows into the economy while allowing the rest of the market to fix itself.
• Hysteresis
Hysteresis is the dependence of the state of a system on its history. For example, a magnet may have more than one possible magnetic moment in a given magnetic field, depending on how the field changed in the past.
• Ricardian equivalence
The Ricardian equivalence proposition is an economic hypothesis holding that consumers are forward looking and so internalize the government’s budget constraint when making their consumption decisions
• Homo economicus
The term homo economicus, or economic man, is the portrayal of humans as agents who are consistently rational, narrowly self-interested, and who pursue their subjectively-defined ends optimally. It is a word play on Homo sapiens, used in some economic theories and in pedagogy.
• Buffer stocks (unemployment and employment)
Unemployment buffer stocks: Under a NAIRU regime, inflation is controlled using tight monetary and fiscal policy, which leads to a buffer stock of unemployment. This is a very costly and unreliable target for policy makers to pursue as a means for inflation proofing
• Inflation anchor
A central bank that credibly promises to snuff out any hint of rising inflation (and inflation expectations) can keep inflation anchored at a preferred long-run target of its choosing. Ironically, the threat of raising the short-term interest rate against inflationary pressure is what keeps nominal interest rates low
• Costs associated with unemployment
A rise in unemployment can cause a negative multiplier effect. Increase in social problems. Areas of high unemployment (especially youth unemployment) tend to have more crime and vandalism. It can lead to alienation and difficulties in integrating young unemployed people into society.
• Relationship between human rights and employment
The right to work is the concept that people have a human right to work, or engage in productive employment, and may not be prevented from doing so. The right to work is enshrined in the Universal Declaration of Human Rights and recognized in international human rights law through its inclusion in the International Covenant on Economic, Social and Cultural Rights, where the right to work emphasizes economic, social and cultural development.
• Why Minsky believed training and education is putting the cart before the horse
preferring instead to first provide jobs and then to upgrade skills through training in the workplace
• Stagflation
In economics, stagflation, or recession-inflation, is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since actions intended to lower inflation may exacerbate unemployment
• NAIRU
NAIRU is an acronym for non-accelerating inflation rate of unemployment, and refers to a theoretical level of unemployment below which inflation would be expected to rise.
• Empirical evidence on inflation targeting
Inflation targeting is a monetary policy where a central bank follows an explicit target for the inflation rate for the medium-term and announces this inflation target to the public. The assumption is that the best that monetary policy can do to support long-term growth of the economy is to maintain price stability.
• Figure 19.2
s
• Job Guarantee, buffer employment ratio, how the JG is supposed to operate as an inflation anchor, NAIBER
The job guarantee is proposed as a way of making full employment compatible with price stability. Rather than sacrifice some employment as a means of moderating inflation, it is contended that price stability can be achieved without inflicting the costs of involuntary unemployment.
• Purchasing off the bottom
he question then arises: how do employment buffer stocks relate to this condition? We used the term loose full employment in relation to the JG because the employment generated is at minimum wages. The government expands the JG pool by purchasing off the bottom of the labour market. In that context, the automatic stabiliser response associated with the conduct of the JG represents the minimum fiscal shift that is required to maintain employment at its previous level in the face of a falling level of private demand.
