Macroeconomics, part 7- Revisiting and Developing Macroeconomic Theory Flashcards
What does the Philips curve show?
The relationship between changes in employment levels and changes in inflation. Short run trade off
Why does the Phillips curve go below the x axis after a certain point?
Once unemployment reaches a certain level, there is such little aggregate demand that deflation occurs
NAIRU definition:
Non acceleratory inflation rate of unemployment. The level of unemployment in the economy where there is no inflation
How does a diagram show demand pull inflation happening?
- Increase in demand causes AD to shift right causing a disequilibrium beyond LRAS. PL has increased. Unemployment has fallen
- Resources are now scarce and more expensive, causing business costs to rise. SRAS shifts to the left.
- This increases price level further, and increases unemployment to its original level.
- Inflation has occured
How can an increase in demand not lead to inflation?
Supply side policies
How can there be elastic and inelastic supply in the long run?
- Elastic supply on the flat part of the Keynsian LRAS curve because more factors of production can be used to reach capacity
- Inelastic supply in the vertical part because all the factors of production have been used up. To increase supply further, supply side policies are required.
Sovereign debt definition:
National debt
Factors affecting the size of the natural rate of unemployment:
- The level of welfare benefits
- The level of income tax
- The level of wage controls in operation and other restrictions in the market
- Trade union power and militancy
- Degree of labour mobility
- The rate of change in the economy and the ability of workers to adapt to these changes
- Social attitudes and institutions
How does the level of welfare benefits affect the natural rate of employment?
If welfare benefits are high, there is a high opportunity cost of working. People remain voluntarily unemployed
How does the level of income tax in the economy affect the natural rate of unemployment?
If tax is too high, people are discouraged from working
How does the level of wage controls in operation and other restrictions in the market affect the natural rate of unemployment?
If there is a minimum wage people are more likely to try and find work. However, at a higher wage rate, employers may not be able to employ that many more people so there may be an increase in part time work
Fisher’s equation of exchange definition:
The idea that increases in price level (inflation), are caused by increases in the quantity of money in circulation (money supply) MV=PT M=money supply V=velocity of circulation P=average prices T=number of transactions
Gresham’s law:
Bad money drives out good
What is the problem with headline inflation?
- Only an average
- Would be different for different people
What do the Monetarists argue will happen if there is an increase in the money supply?
Inflation. There will only be a short term gain
