New Macro Flashcards
Costs of Inflation
- Shoe Leather Costs
- Menu Costs
- Loss in international competitiveness
- Value of Savings are reduced
Benefits of Inflation
-Reduces the cost of debt in real terms
Describe - Shoe Leather Costs
The cost applied to the constant movement of money in order to get the highest interest rate to maintain the value.
Describe - Menu Costs
The cost of businesses having to constantly change their prices in line with inflation.
Describe - Loss in international competitiveness
The rising cost of production increases the prices relative to other countries, demand pull inflation.
Describe - Value of Savings are reduced
Money stored in banks, interest rates perhaps not at the same rate of inflation so money loses value.
Describe - Reduces the cost of debt in real terms
Fixed price debt reduces as it becomes easier to pay it off, due to the value increasing not in real terms.
Demand Pull Inflation
Caused by the increases in aggregate demand
Cost Push Inflation
Caused by the increases in the cost of production, like the depreciation in the exchange rate increasing the price of imports.
Benefits of Unemployment
-Larger pool of labour
Costs of Unemployment
- Loss in output
- G increases on JSA
- Hysteresis
- C reduces
Describe - Loss in output
They’re insufficient workers producing therefore loss in the amount firms produce.
Describe - G increases on JSA
Governments have to spend more on benefits, although there is an opportunity cost of this.
Describe - Hysteresis
Long term unemployment meaning loss in skills and their productive potential is lost.
Describe - C reduces
Unemployed only have JSA, no wages so they cannot spend their money on goods/services.
Describe - Larger pool of labour
Benefits firms as they can now choose the most productive and efficient workers to increase their productivity.
Deflation
A continuous fall in the average price levels.
Supply Side Deflation
Caused by the increase in aggregate supply it reduces cost push inflationary pressure, growth.
Demand Side Deflation
Deflationary Spiral
- Consumer delay consumption for the future
- Expansionary monetary policy to stimulate AD negated due to the real interest rate being positive if the nominal was 0%, encouraging saving
- Increases the real value of debt
Tariff
A tax levied on imports increasing their price reducing their competitiveness with domestic products.
Quota
Limits the amount of imports to a country to prevent mass amounts of cheap alternatives to domestic goods.
Export Subsidy
Reduces the firms cost of production, if used, increasing international competitiveness as they have cheap goods alternatives to sell.
Red Tape
Legal barriers to selling certain types of goods/services to certain other countries.
Balance of Payments
A record of a countries trade and investment with other countries.
Current Account
A records of a countries trade in goods, trade in services, income and transfers. VALUE.
Current Account Deficit
When the added values are negative it is a deficit.
Demand CA Deficit Causes
Strong Economic Growth - People import more
Recession Overseas - Less demand for products
Strong Exchange Rate - Imports cheap exports dear
Supply CA Deficit Causes
Low Productivity - Reduces competitiveness
High Labour Costs - Goods more expensive
Poor quality/unreliable - Less likely to buy
CA Deficit Consequences
Increased unemployment
Reduction in AD
(X-M) -ve
Cannot pay off national debt
Current Account Surplus
When the added values are positive it is a surplus.
Demand CA Surplus Causes
Weak Exchange Rate - Exports cheap imports dear
Economic Growth Overseas - More demand
Supply CA Surplus Causes
Low Labour Costs - Goods are cheap
High productivity - Efficient goods are cheaper
Quality/reliable - More likely to buy
CA Surplus Consequences
Increased employment
Environmental costs
Resource depletion unsustainable for future
Expansionary Monetary Policy
Monetary Policy that increases AD
Contractionary Monetary Policy
Monetary Policy that decreases AD
Monetary Policy
Changes in money supply, interest rates and exchange rate
Exchange Rate Evaluation
Depends on the PED, price inelastic demand may reduce by a small amount
Size of appreciation/depreciation
Income abroad determines how much is spent
Measuring Unemployment
Claimant Count - Measures those claiming benefits, includes those claiming in the informal sector.
Labour Force Survey - % of population asked, sampling errors possible.
