UK Inflation and Unemployment Flashcards
Week 3
1
Q
What is unemployment? How is this measured?
A
- ONS/ILO says that unemployment is out of work and actively seeking but cannot find the job
- Measured by Claimant Count and Labour Force Survey
2
Q
What does ‘flows’ mean about unemployment?
A
- Unemployment has ‘flows’ arounf the labour market
- Flows between employment, unemployment and economic activity
- ONS said that there was 75,000 net flow in half of 2020
3
Q
What is the idea on full employment? What was Keynes’ argument?
A
- Key economic objective
- Set by 1936
- 3 main types of unemployment- cyclical (demand deficient), structural, frictional
- Argued that macroeconomic policy should aim to minimise demand-deficient unemployment
- Impossible to obtain 0%, Beveridge (1944) said that full employment is around 3%
4
Q
What has happened to Keynesian ideology?
A
- Since 1960s/1970s, Keynesianism has declined and inflation-targetting has been seen as more vital
- Governments have started to look to more micro-objectives around unemployment, skills mismatch
5
Q
What is equilibrium unemployment?
A
- Involuntary unemployment, trade unions and monopsony oiwer suggests that LM are imperfect, hence a ‘market clearing’ wage is not achieved
- LM equilibrium: An unemployment rate that would occur in the absence of cyclical changes (frictional and structural)
- This is also the NAIRU/Natural Rate
- NAIRU-> unemployment level that keeps wage inflation stable
6
Q
What determined NAIRU?
A
- NAIRU comes from the bargaining process between firms and workers
- Workers have a target real wage, which depends on the overall state of the economy
- Businesses can meet these wages given their mark-ups and worker productivity
7
Q
What has happened to the NAIRU since 1985? Why?
A
- Falling since 1985
- Means economy can reduce unemployment, without wage rises
- Slower population growth and increased average age
- Volatile Oil prices
- Reduction in TU power and privatisation
- Benefits reforms
8
Q
What is potential GDP? How do you calculate this?
A
- Potential GDP is the quantity of real GDP produced at the NAIRU
- Actual GDP - Potential GDP = Output Gap
- If Output Gap > 0; NRU>unemployment rate
9
Q
What is Price Level?
A
- PL = the average level of prices and value of money
- Inflation is the increase of PL, deflation is the decrease of PL
- Measured by CPI (basket of goods)
10
Q
What are inflation cycles? When do they occur?
A
- LR; infation occurs if QoMoney > Potential GDP
- SR; many different factors contribute
- Demand Pull- From expansionary policy (stemming from rising AD)
- Cost Push- From rising costs to the firm
- Persistant increase means AD increases, therefore cost push spirals and stagflation follows
11
Q
What is the SR Phillips Curve?
A
- Considered to be a tradeoff between inflation and unemployment in the 1960s
- SRPC: Rate of growth of money wages linked to inflationary pressures, which leads to the key tradeoff
- This idea is that Governments will have to use policy to stay on a given point on the curve
12
Q
When did the SRPC dissolve? Provide some reasons for this
A
- 1970s OPEC crisis created stagflation, meaning that the SRPC broke down
- Toughest aspect was the changes in inflationary expectations [shifts PC right]
- Reasons include: collapse of Bretton Wood (1971), Barber Boom (1972) and spikes in growth of MS
13
Q
What does Friedman think about LRPC?
A
- In LR, there is no trade-offs between inflation and unemployment
- Inflation is caused by excessive growth in the money supply
- SR trade-offs will not persist due to expectations
- Wage/inflation expectations adjust for workers
- Price/cost expectations adjust for firms
14
Q
How to reduce unemployment below the NRU without inflation?
A
- You must manipulate peoples expectation on prices
- This was done by giving Bank of England independance in 1998
- This is also done by increased supply side capacity or increasing labour market flexibility
15
Q
What is the Phillips Curve equation?
A
- π(t) = γπ(t-1) + φEtπ(t+1) + θ(yd - ys) + wt
- Actual inflation = past inflation + expected inflation + output gap + supply shocks
