Macroeconomics Flashcards

Question

What is the Money Market?

Answer 1

Wages and Inflation

Answer 2

Unemployment and Aggregate Supply

Answer 3

The rate of change of prices NOT simply, or even, high prices

Answer 4

Positives: - Some inflation is good: ensures returns to investment (asset prices) Negatives: - Uncertainty → suboptimal allocation → lower efficiency - Transaction / Shoe-leather costs → higher costs - Redistribution: not all households/agents face same rate of inflation

Answer 5

Above 20-30% Inflation becomes uncontrollable (requires devaluation & policy break) and erodes asset values, investment, incomes and competitiveness

Answer 6

1) Excess demand / positive shocks at full employment - See later: when demand raises P than Q (effect depends on AS slope) 2) Excessive increase in money supply - Also linked to shocks at FE: more money at given (full-potential) output have to lead to rising P –for given velocity of money 3) Expectations (not a ‘ cause ’ by itself) - Once inflation rises, expectations may become self-fulfilling / sticky 4) Rising prices abroad / supply shocks (imported inflation) - E.g., rise in oil / energy prices; rising int’l demand for domestic goods 5)Rising wages / costs and domestic supply shocks - E.g., through trade unions; a sudden fall in productivity

Answer 7

monetary policy has no real-economy affects - High wages do not cause permanent inflation: ↑W→↑P→↓AD→↑U - Inflation is the outcome of profligate fiscal/monetary policies

Answer 8

inflation often due to asset-speculation - Role for policy as regulator (control ‘animal spirits’ – see financial market regulation today) and manager (control/boost demand)

Answer 9

inflation due to shocks or distortions - Shocks are exogenous: little to do (but diversity, energy security) - Raise policy credibility / Apply conservative fiscal/monet. policies to reduce inflation expectations (see CBI & moral hazard / signalling) - Implement policy reforms to remove distortions (unions, EPL)

Answer 10

When (high) inflation and unemployment co-exist 1) Rising production costs due to / despite falling demand (e.g., due to losing out on economies of scale) 2) When expansionary policy is called upon to address supply-side shocks / competitiveness problems 3) When inflation erodes investment leading to deficient demand

Answer 11

A curve showing that a higher inflation rate is accompanied by a lower unemployment rate u = un – α (π - πe)

Answer 12

The interplay between quantity- and price-adjustments This in turn depends (among other things) on how far we are from the economy’s point of full capacity

Answer 13

Non-accelerating inflation rate of unemployment - In the SR, U varies due to differences b/w expected & actual inflation - In the LR agents ‘ can ’t be fooled’, thus expected and actual inflation are equal and unemployment returns to its LR value - At this rate, any attempt to lower U will simply accelerate inflation

Answer 14

- The economy operates always at (or near) full capacity - Increases in investment / technology and/or reductions in frictions (rise in flexibility) are necessary to raise the capacity of the economy, pushing aggregate supply up and leading to more employment – this then shifts the LR-PC to the left (NAIRU falls)

Answer 15

- The economy is rarely at ‘full capacity’ – deficiencies - Increases in investment are unlikely when demand is ‘depressed’ and uncertainty is high; aggregate supply does not expand unless there is (govt) intervention to stimulate demand and, through this, aggregate supply

Answer 16

The volume of output firms wish to supply at each price level

Answer 17

- Technology and level of unutilised resources - Input prices (labour, capital, raw material)

Answer 18

Sluggish wages and prices