Theme 2 Inflation + Unemployment

Question 1

Real wage inflexibility

Answer 1

Reducing wages to fix disequilibrium in the labour market solving unemplpyment

Question 2

Technological unemployment

Answer 2

Machines replace workers

Question 3

Regional unemployment

Answer 3

Industries are concentrated in some areas so have greater dependence on an industry which if collapses causing high rates of unemployment in that region

Question 4

Voluntary unemployment

Answer 4

Chose to be economically inactive as make more money on benefits

Question 5

Economically inactive

Answer 5

People who aren’t looking for work and aren’t in work

Question 6

Underemployment

Answer 6

Working minimal hours means unemployed larger proportion of the time distorting unemployment figures

Question 7

Unemployment in the economy represnts

Answer 7

A loss of potential output

Question 8

The opportunity cost of each unemployed person is their

Answer 8

Foregone cost

Question 9

Increased costs of benefits is considered a

Answer 9

Transfer of payment

Question 10

Two impacts of unemployment on firms

Answer 10

Easier employment conditions: lower production costs, lower wage demand thus lower wages and higher profits

Falling demand: less consumers so less profit

Question 11

Two impacts of unemployment on consumers

Answer 11

Lower prices as low demand

More inferior goods and less normal goods as lower income

Lower incomes cause a fall in consumer confidence and job security so demand for goods fall

Question 12

Three costs of unemployed

Answer 12

Mental health problems (depression–NHS)

Standard of living (disposable income)

Social stigma/perception (lazy, idle)

Falling skill levels (cost-push inflation graph causing a decrease in potential real output)

Question 13

Cyclical unemployment (low demand)

Answer 13

Demand deficiency
Aggregate demand lowers
Recession
Fewer employed
Demand-pull inflation graph
Real output falls in recession
Negative shift in demand for labour
Supply and demand curve
D2 is constrained by the decrease in real output so fewer workers are employed by firms

Question 14

Inflation costs to consumers

Answer 14

Real wages fall if nominal wages stay that same and price levels increase

Question 15

Inflation costs to firms

Answer 15

Menu and shoe leather costs

Question 16

Inflation costs to government

Answer 16

Inflation reduces the real burden of national debt

Question 17

Unemployment rate and an advantage of it

Answer 17

1.6million/economically active x 100

Can compare against other countries with different populations

Question 18

Job seekers allowance rate is

Answer 18

Roughly £60-£70 depending on age

Question 19

Advantages of the claimant count

Answer 19

Includes everybody
Cheaper and quicker to collect info
More details collected

Question 20

Cons of claimant count

Answer 20

Not all countries do it whereas ILO is used in all countries

Question 21

ILO pro

Answer 21

Most countries use it

Question 22

ILO con

Answer 22

Only a sample

Question 23

The ILO count is taken from the

Answer 23

Labour force survey

Question 24

Cost push inflation graph

Answer 24

AS AD graph with AS2 to the left

Question 25

Factors causing cost-push inflation

Answer 25

Increase in raw materials - due to the rise in world commodity prices increases in component cost causes negative shift in AS Rising labour costs - negative shift in AS Higher components costs from devaluation of the pound or increased supply of oil

Question 26

M X V =

Answer 26

P x Y

Question 27

What happens if only V is constant and not Y

Answer 27

Firms may increase Y real output if high levels of unemployment, recession, poor economic growth so there is no inflation

Question 28

Measures of inflation

Answer 28

CPI | RPI

Question 29

Why are items in the cpi weighted

Answer 29

To show the correct amount of income spent on an item as it is bought more often

Question 30

How to calculate percentage change in inflation

Answer 30

New price - old price /old price X100

Question 31

Geometric mean calculation

Answer 31

all numbers multiplied together then rooted by amount of numbers

Question 32

Arithmetic mean

Answer 32

Add all numbers then divide by amount of numbers

Question 33

G

Answer 33

Rpi>Cpi

Question 34

Rpi vs cpi

Answer 34

Rpi includes house prices, spending when abroad, council tax Weights from ONS living cost and food survey Cpi includes income tax and foreign students tuition fees and weights from National accounts data

Question 35

Cons of RPI

Answer 35

Uses less accurate arithmetic mean | Not the standard measure

Question 36

Cons of cpi

Answer 36

Doesn't include house prices

Question 37

Reasons for demand pull inflation (AS AD graph with AD2 right)

Answer 37

Depreciation of exchange rate - increases import price and reduces export price Reduction in income tax Rise in house prices

Question 38

Stages of calculating the CPI

Answer 38

Price survey measuring then general price level of a representative basket of goods and services (from 20000 shops and 70000 locations - collected at beginning of month) using the living costs and food survey Relative weightings are assigned to the different items included within the basket of goods and services based on the relative importance of household spending Prices are measured and recorded on a monthly basis Recorded priced are aggregated into an index that provided the general price level Calculation of inflation from indexed figures

Question 39

Why do the gov have low rates of inflation

Answer 39

- prevents fall in real income as nominal wages stay constant and price levels increase - hinder international trading competitiveness - consumer utility - but doesn't reduce real burden of national debt

Question 40

What is inflation target

Answer 40

Target set by the government for the bank of England to meet of a 2% inflation rate which is symmetrical by 1%. It is adjusted via quantitative easing and changing interest rates