Macroeconomic performance 2 Flashcards
Long run phillips curve
government AD stimulus to correct unemployment. AD stimulus > RNO rises > Inflation rises > unemployment falls
short run phillips curve
The short-run Phillips Curve illustrates an inverse relationship between unemployment and inflation; as the level of unemployment falls due to economic growth the level of inflation will rise, and vice versa
labour market disequilibrium
A labour market disequilibrium can occur when the government sets a minimum wage, that is, a price floor on the wage that an employer can pay its employees. If the stipulated price floor is higher than the labour equilibrium price, there will be an excess supply of labour in the economy.
money illusion
Money illusion is the belief that money has a fixed value and the effects of inflation are ignored. Because of money illusion, during inflation, individuals may perceive an increase in nominal income as higher welfare – when this is actually an illusion and their real spending power has not changed because prices have risen at the same rate as wages.
adaptive expectations
believe the future will be like the immediate past
natural rate of unemployment (NRU)
The natural rate of unemployment, also known as the non-accelerating inflation rate of unemployment (NAIRU), is the level of unemployment at which inflation is steady and there is no upward or downward pressure on prices. In other words, it is the rate of unemployment that is consistent with stable inflation.
rational expectations
predict the future by using all available information
Trade off
Trade-offs in economics refer to exchanging one thing for another, where choosing one option entails giving up the opportunity to pursue an alternative option.
inflation targetting
Inflation targeting is a central banking policy that revolves around adjusting monetary policy to achieve a specified annual rate of inflation. This is known as the target rate, which is normally set at around 2% to 3%. The principle of inflation targeting is based on the belief that long-term economic growth is best achieved by maintaining price stability, and price stability is achieved by controlling inflation.
real wage unemployment
Real wage unemployment is a situation in which wages are set above the equilibrium level, resulting in an excess supply of labour or unemployment. It occurs when the minimum wage or other forms of wage regulation, such as collective bargaining agreements, cause wages to be higher than what would be determined by the market forces of supply and demand.
Real wage unemployment occurs when wages are set above the equilibrium level causing the supply of labour to be greater than demand.
money supply
The total amount of money in an economy at a given time.
quantity theory of money
The quantity theory of money states that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold.
MV=PT
transmission mechanism
This is the process through which monetary policy decisions affect the economy in general and the price level in particular. The transmission mechanism is characterised by long, variable and uncertain time lags. Thus it is difficult to predict the precise effect of monetary policy actions on the economy and price level.
explains how changes in interest rates feed through to affecting aggregate demand, output and prices.
reverse causation
Reverse causality helps economists determine the likelihood that a financial condition, such as high credit scores, leads to an action, such as responsibility, and may be the reverse of what they anticipated.
static expectations
economic agents ignore the fact that inflation can change
economic policy
actions taken by the government to influence economic performance
fiscal policy
A government’s policy regarding taxation and public spending. It can be loose (with the emphasis on increased spending and lower tax revenue to boost economic activity, with the acceptance of a wider fiscal deficit) or tight (with the emphasis on cutting spending and raising extra tax revenue, resulting in a slower-growing economy.
expansionary fiscal policy
changes to taxes, expenditure and borrowing that aim to increase the level of economic activity
contractionary fiscal policy
changes in taxes, expenditure and borrowing that aim to reduce the level of economic activity
monetary policy
Monetary policy involves changes in interest rates, the supply of money & credit and exchange rates to influence the economy.
What happens when interest rates rise?
Have the effect of slowing down the rate of growth of demand including consumption:
- increased incentive for people to save
- Mortgage rates are likely to rise causing a fall in the effective disposable income of mortgage-payers.
- interest rates on credit cards and other loans will increase making borrowing more expensive
- may dampen consumer optimism causing people to save more and spend less
What happens when interest rates fall?
increase in supply of money and credit = expansionary monetary policy
- cost of servicing loans/debt is decreased, increasing spending power
- consumer confidence should increase leading to more spending
- effective disposable income rises - lower mortgage costs
- business investment lifted
- housing market effects = more demand and higher prices
- exchange rates and imports = cheaper currency will increase exports
national debt
debt is the total amount owed by the government sector that has accumulated over the years
supply-side policies
policies that improve the productive potential of an economy. This is illustrated by an outwards shift in LRAS.
Market-led policies - to make markets work better and give the private sector more freedom
State/government intervention in markets to overcome market failures
evaluating supply-side policies
- can have long time lags but this depends on the type of policy
- may be ineffective when there is low aggregate demand when reflationary monetary and fiscal policies would be more appropriate
- some may lead to inequalities in income or wealth
- state intervention to “pick winners” in different industries/sectors may be ineffective i.e. risks of government failure.
- sustainability issues arise if policies raise a countries long-term growth rate - leading to increased externalities such as pollution
- supply-side improvements can also occur from non-government policies such as firms innovating, investing, productivity improvements
