Topic 7 Flashcards
IF EQUILIBRIUM OCCURS BELOW POTENTIAL OUTPUT
- Actual output Qe < potential output Qp
- Actual unemployment > natural unemployment
- Cyclical unemployment > 0
- The self-correcting mechanism works very slowly.
Competition for jobs –> wages fall (very slowly)
So AS shifts to the _____
May take a long time to reach potential output Qp
Cyclical unemployment persists (“stagnation”)
right
Suppose the inflation rate rises –
- the purchasing power of financial assets will _____.
- consumers’ wealth falls in real terms
- so consumers _____ their expenditure (C)
fall; reduce
Aggregate Demand curve
In summary, if the inflation rate rises –
- aggregate expenditure falls
- aggregate expenditure is real GDP on the ______ side (“the quantity of real GDP demanded”)
demand
Aggregate Demand curve
So there is a ___________relationship between the inflation rate and real GDP demanded.
The AD curve shows this relationship
downward-sloping
Three things make aggregate demand downward-sloping ?
- Wealth effect
- Saving interest rate effect
- Exchange rate effect
Potential GDP, or the natural rate of output, is the GDP level that would prevail if __________ (“full employment”) apply
normal conditions
Aggregate Supply curve
- If product prices in general rise, while costs of inputs (e.g. of labour, oil, etc.) are relatively steady
+ _______ increase
+ producers have to expand output - So there is an upward-sloping relationship between the inflation rate and real GDP supplied
The AS curve shows this relationship
profits; incentive
Shifts in AS curve
- If real GDP supplied changes because of a change in a factor other than the inflation rate, the AS curve shifts.
- Examples of AS shifting to the left: higher costs due to:
+ _______ increasing while product prices are steady; or
+ a rise in world oil prices while most other prices remain stable.
wages
Frictional unemployment arises when people are between jobs for _________.
normal reasons.
Structural unemployment is caused by shifts in the pattern of demand, or _________, such that some industries become smaller, and some skills become obsolete.
technological changes
________ unemployment = structural + frictional unemployment
Natural
Natural unemployment is essentially ________ over the course of the business cycle.
steady
Cyclical unemployment _____ with the business cycle, that is, it depends on the state of the economy:
- it rises when the economy is weak and
- falls when the economy is strong.
varies
_______ unemployment = natural + cyclical unemployment
Actual
Starting from Qe = Qp, an ________________ (e.g. oil price increase) will shift AS to the ______–
- Inflation rate will increase
- while output will fall
- so unemployment will rise
So we’ll have “stagflation”, a combination of “stagnation” and “inflation”
adverse supply-shock; left
If equilibrium occurs ABOVE potential output
(Situation C)
- Actual output Qe > potential output Qp
- Actual unemployment < natural unemployment
- Cyclical unemployment < 0
- The economy has a self-correcting mechanism.
Competition for labour will drive up wages
So AS shifts to the ______(gradually)
Until Qe = Qp
Effect: ___________
left; inflation increases
More likely: equilibrium occurs ____________ Qp.
below or above
Unemployment results in
- Lost _______and incomes
- Lost ___________
production; human capital
The loss of income is devastating for those who bear it. Employment benefits create _________ but don’t fully replace lost wages, and not everyone receives benefits.
a safety net
Prolonged unemployment permanently damages a person’s job prospects by destroying __________.
human capital
Inflation erodes the ________ of nominal wages
but often nominal wages rise just as fast as (or faster than) prices
- what is important is real wages (refer to last week’s lecture)
- Other types of income, e.g. indexed pension, real interest
==»Some people can ______ inflation (i.e. they can demand and get adequate compensation for it) but others are unable to do so
purchasing power; anticipate
_________ redistributes wealth.
Unexpectedly high inflation redistributes wealth from the _______ to the ________
Unexpected inflation; lender (creditor); borrower (debtor)
Many experts argue that once inflation takes hold and rises above moderate (e.g. single-digit) levels, it tends to become _________.
unpredictable
There are short term ______ of real GDP around potential GDP.
fluctuations
The long term trend (potential GDP) is _______.
rising
Potential GDP is the quantity of real GDP produced when all the economy’s labour, capital, land, and entrepreneurial _________ are fully employed.
ability
Cycical unemployment —-> ________ chair
not enough
Friction unemployment —-> _____ chairs but people need to find them and they are switching chairs
enough
Structural unemployment —> _______ chairs but the types of chairs do no match what people need
enough
