Macroeconomics - unemployment and inflation Flashcards
Demand-pull inflation
- Rise in aggregate demand, but little change in aggregate supply
-May be caused by a growing economy, where exports are increased, govt spending is increased and consumers feel confident to spend money
Cost-push inflation
-when the price levels of goods and services increase due to a rising cost of wages and raw-material
-no change in demand level
-high costs are pushed onto consumers through increased prices
Sufferers of inflation
-People on fixed wages, if their wages do not rise with inflation then they will have less disposable income
-Creditors of fixed interests, receive less value of money than what they lent
-Taxpayers, as it can push you up into a higher tax bracket
Beneficiaries of inflation
-Holders of assets, prices of their assets increase with no additional cost
-the government, GDP and tax-revenue increases from inflation
-Debtors with fixed interests, when inflation increases faster than interest rates the value of assets decrease
If inflation is too high
-Purchasing power is reduced
-Workers may seek large wages to compensate. Thus firms must raise prices and have to employ less workers
-returns on investment may be lower
-businesses need to update their prices and consumers spend time comparing prices
Headline inflation
-total inflation in an economy
If inflation is too low
-Consumers will delay purchases if they expect prices to fall
-Businesses have to reduce wages and may have to lay them off instead
The phillips curve
Short run:
-trade-off between unemployment and inflation, when interest rates change
Long run:
-no trade-off
-consumers have factored in inflation expectations and demand more wages
-leads to increase unemployment and the economy returns to NAIRU and inflation stabilises
Underlying inflation
-inflation calculated by CPI has the bottom and top 15% trimmed
-volatile goods with rapid fluctuations are not counted
-represents the expenditure patterns of households better
NAIRU
-the lowest unemployment rate that can be achieved without causing wage growth and inflation rise
- used to judge the spare capacity in the economy
-inflation is steady at NAIRU
Frictional unemployment
-occurs when people move between jobs in the labour market
-it is naturally occuring and is always part of the economy
-generally shorter than a month
-caused by imperfect market knowledge and immobility of labour
Structural unemployment
-Occurs when there is a mismatch between available jobs and people looking for work
-due to jobseekers lacking skills or changes in demand for particular jobs
-is longer lasting than other forms of employment
-exists when economic conditions are good
Seasonal unemployment
-occurs when people are unemployed during particular times of the year, demand for labour is lower than usual
Cyclical unemployment
-Occurs with changes in economic activity over the business cycle
-during a downturn, there is a shortage of demand through a fall in AD e.g.
-it lasts between 1-12 months
Underemployment
-people of working-age who would rather work more time or make better use of their skills
-indicator of an economy’s spare capacity
Inflation definition
A general increase in prices and a fall in the value of money
Unemployment definition
Anyone who is in the labour force and is not currently employed
