Unemployment and Inflation and how they link

Question 1

Explain GDP equilibrium and GDP in relation to an equilibrium

Answer 1

If GDP was somehow below the crossover between income and expenditure, there is a gap between what households are looking to spend and what the economy is looking to produce
Likewise: if GDP is above crossover there is pressure in other direction
Ultimately in both these situations in long run we converge to equilibrium point
Long term they are in alignment to equilibrium point

Question 2

If injections are greater than withdrawals what happens to aggregate demand an why

Answer 2

Firm produce more, hence using more labour and other resources
Household income rise
Households spend more increasing demand
Firms produce more
Ultimately: J>W -> Y increases -> W increases -> J=W and we reach an equilibirum

Question 3

Explain what the multipler is in terms of money demand

Answer 3

Number of times a rise in GDP is bigger than the inital rise in aggregate expenditure that caused it

Question 4

Explain what marginal propensity to consumer domestically produced goods is in terms of money demand

Answer 4

The proportion or amount of any increase in available wealth that is spent on domestically produced goods

Question 5

Explain the marginal propensity to withdraw in terms of money demand

Answer 5

Everything else outside of the inner flow of circular flow of income

the proportion of any rise in GDP that gets withdrawn

Question 6

Explain velocity of circulation

Answer 6

Number of times annually that money on average is spent on goods and services that make up GDP

Question 7

Explain equation of exchange and give the equation

Answer 7

Equation of exchange - Total level of spending on GDP equals the total value of goods and services produced that go to make up GDP
MV=PY where M=money supply, V=velocity of circulation, P= price level, Y= real GDP

Question 8

What is the long run theory of portfolio balance

Answer 8

Excess liquidity -> Increased spending on goods/services

Question 9

Define Unemployment

Answer 9

The number of unemployed expressed as a percentage of the labour force

Question 10

Define claimant unemployment

Answer 10

those in receipt of unemployment related benefits

Question 11

Define standardised unemployment rate

Answer 11

people of working age who are without work available for work and actively seeking employment

Question 12

Define unemployment rate

Answer 12

is based on the estimated number of persons unemployed expressed as a % of the total labour force

Question 13

What are the inflows and outflows into unemployment figure

Answer 13

Increasing unemployment: from outside labour force(not currently included, moving from not being in labour force to being unemployed), from jobs(people who were in employment)

Decreasing level of unemployment - jobs (people going to jobs), moving into labour (people moving to outside of the labour force)

Question 14

What are reasons for disequilibrium unemployment

Answer 14

Real wage unemployment
Demand deficient unemployment - disequilibrium unemployment caused by a fall in aggregate demand with no corresponding fall in the real wage
Growth in labour supply

Question 15

Explain what disequilibrium unemployment means

Answer 15

If you have a situation where the equilibrium level is below the level of wages expected in the workplace. Even though there is potential work available , disequilibrium occurs as people are unwilling to work for the wages that are available.
Reduction in demand wages will not fall immediately

Question 16

Can there be equilibirum unemployment

Answer 16

Yes but there will still be a proportion of people not working even with balance between demand and supply of labour

Question 17

Why will there always be a small level of unemployment?

Answer 17

Frictional unemployment - unemployment that occurs as a result of imperfect information in the labour market
Structural unemployment - unemployment that arises from changes in the pattern of demand or supply in the economy
Seasonal unemployment - demand for labour is lower at certain times of the year in industry or region

Question 18

What is the measure of inflation for Ireland and the euro area

Answer 18

Euro area = HICP - Harmonised index of consumer prices

Ireland = CPI - consumer price index

Question 19

Define inflation

Answer 19

The percentage annual increase in prices

Question 20

Define consumer price inflation

Answer 20

The percentage annual increase in average level of prices of consumer goods and services - most common measure of inflation

Question 21

Define cost of care inflation

Answer 21

(much higher than consumer prices) - model the cost of providing long term care for someone, what’s the appropriate compensation to ensure they cna care for this person

Question 22

What is the CPI measure looking at

Answer 22

Thinking about the average eirish consumer and what they choose to spend their weekly icoe on. What are the things in Ireland that would drive the level of inflation for our economy.

Question 23

What is the HICP measure looking at

Answer 23

Looks at basket of goods for the average european consumer (not individual countrie) looking at what average european spend and applying that into and irish context

Question 24

What are four costs of inflation

Answer 24

Redistribution of purchasing power
Uncertainty
Balance of payments
Resources

Question 25

What are four things to examine under inflation in an economy

Answer 25

Commodity prices - what’s happen to oil, glass, gold
Food prices - locally or nationally
House prices - residential
Wage rates

Question 26

What is demand push inflation

Answer 26

Inflation cause by persistent rises in aggregate demand

Question 27

What is cost push inflation

Answer 27

Inflation caused by persistent rises in the cost of production. Cost push inflation can be driven by: supply shocks or continuing risk in prices

Question 28

Inflation expectations ECB

Answer 28

Workers and firms take account of the expected rate of inflation when making decisions

European central bank: price stability is defined as a year-on year increase in the harmonised index of consumer prices (HCIP) for the euro area of below 2%
This target allows companies and business to make decisions based on that rate of inflation

2-3% around the world is a common target

Question 29

Explain full employment level of GDP

Answer 29

The level of GDP at which there is no deficiency of demand

Question 30

Explain recessionary gap

Answer 30

The shortfall of aggregate expenditure below GDP at the full-employment level of GDP greater withdrawals than injections

Question 31

Explain inflationary gap

Answer 31

The excess of aggregate expenditure over GDP at the full employment level of gdp Greater injections than withdrawals

Question 32

Define a phillips curve

Answer 32

curve showing the relationship between (price) inflation and unemployment

Question 33

Define an expectation augmented phillips curve

Answer 33

a short run phillips curve whose position depends on the expected rate of inflation

Question 34

What sort of relation exists between inflation and unemployment

Answer 34

Inverse relationship