Unemployment and Inflation Flashcards
What is the price level?
The average level of prices and the value of money
Define inflation
A persistently rising price level
Define deflation
A persistently falling price level
What is hyperinflation?
An inflation rate of 50% a month or higher
What information do the terms ‘price level’, ‘inflation’, ‘deflation’ and ‘hyperinflation’ provides/help us with?
1.) Measuring the annual percentage change of the price level (inflation or deflation rate)
2.) Distinguishing between money values and real values of economic variables (i.e.: student loans)
List 4 problems of inflation
1.) Raises prices but not wages -workers are worse off, employers are better off
2.) Money the borrower repays buys less than originally - borrow wins, lender losses
3.) Raises firms profits, rise in investment thus boom in production and employment - real GDP > potential HOWEVER these effects are TEMPORARY causing investment dry up, spending falls, unemployment rises and real GDP < potential
List 2 problems with deflation
1.) Borrowers are worse off and cut their spending; fall in total spending, recession, rising unemployment
2.) Redirects resources from productive activities to forecasting inflation - becomes more profitable to forecast the inflation/deflation rate than to invest in a new product
What does the CPI measure?
The average price of goods and services paid by urban consumers in 30 metropolitan areas for a ‘fixed’ basket of consumer goods and services
It is defined to equal to 100 for the reference base period
How is the CPI basket determined?
Income and Expenditure Survey
Explain the patterns of inflation
1.) When price level rises rapidly, the inflation rate is high
2.) When the price level rises slowly, the inflation rate is slow
Who are discouraged workers?
People give up looking for a job and so no longer count as unemployed
What is the participation rate?
Ratio of the labour force to the total population of working age
What is the relationship between discouraged workers and participation rate?
Because of discouraged workers, a higher unemployment rate is typically associated with a lower participant rate
What is the GDP deflector?
Ratio of nominal GDP to real GDP:
Nominal GDP/Real GDP
