Unemployment+Inflation

Question 1

UK target and performance?

Answer 1

• target= 2.0%
• 2015= 0.2%
• however over past 4 years, avg 2.5%

Question 2

Cost-push inflation?

Answer 2

=inflation caused by economy-wide increases in production costs so businesses must increase prices

Question 3

Demand-pull inflation?

Answer 3

= when there is little spare capacity in the economy; an increase in AD will increase prices

Question 4

Deflation?

Malevolent vs benign?

Answer 4

=fall in the general price level into negative figures

Malevolent= significant downturn in economic activity causes fall in prices (fall in AD)

Benign= technological advances that bring down the price of goods and services e.g smartphones

Question 5

Disinflation?

Answer 5

=fall in the general price level, but still in positive figures

Question 6

How is inflation measured?

Answer 6

=consumer price index (CPI)= weighted price index used to measure change in prices of a typical ‘basket of goods’ e.g chilled pizza

RPI= includes house prices (mortgages)

Question 7

Limitations of CPI?

Answer 7

• different population groups experience different rates of inflation, what is ‘typical’?
• does not include housing even though mortgage is high proportion of spending
• may over-estimate inflation, some goods may be more expensive because they’re better

Question 8

Consequences of inflation? (4)

Answer 8

1. International uncompetitiveness if export prices increase
2. Menu costs= administrative (business) costs for changing their prices
3. Worsening distribution of income= richer tend to be borrowers, poorer savers
4. Fiscal drag= failure to raise personal tax thresholds in line with inflation that brings low paid into tax net, higher inflation= higher income therefore more income tax

Question 9

Quantity theory of money?

Answer 9

Assumes direct relationship between money supply+price level

MxV=PxT (Fishers equation)
M= money
V= velocity (times round circular flow of income)
P= price level
T= transactions (output)

Assumes M+P can change but T+V constant

Question 10

What is the natural rate of unemployment?

Answer 10

=when labour market is at equilibrium, difference between those who would like a job at current wage rate and those who are willing+able to take a job
Frictional+structural unemployment

Question 11

Full employment?

Answer 11

=where labour market has reached equilibrium: when those active+willing are able to find jobs
Only frictional unemployment

Question 12

Replacement ratio?

Answer 12

=ratio of total resources received when unemployed to those when in employment

1= worker receives same income from unemployment as employment

Disposable income out of work/
Disposable income in work

Question 13

Causes of unemployment? (5)

Answer 13

• Frictional= workers in between jobs during time-lag
• Structural= certain industries decline due to long term changes in market conditions such as geographical/occupational immobility e.g mining
• Technological= labour saving technology
• Seasonal= summer/winter workers
• Cyclical= relates to the cyclical trends in growth and production that occur within the business cycle

Question 14

Keynesian (Demand-deficient)?

Answer 14

=involuntary unemployment due to a lack of demand for goods+services

Question 15

Factors that determine natural rate of unemployment?

Answer 15

• availability of job info
• skills and education
• labour mobility
• flexibility of labour market (part-time work)
• hysteresis= longer unemployed, skills less valuable+de-motivated

Question 16

Short-run Philips curve?

Answer 16

=assumes inverse relationship between inflation+unemployment
•low levels of unemployment, workers+trade unions over-confident about wages so push for higher
•^ cost-push inflation
•conversely, inflation fall as unemployment rises due to weak demand+bargaining position

Not always true! Except in 2010

Question 17

Long-run Philips curve?

Answer 17

=Gov don’t need to intervene as free market inflation will control employment

•when inflation at 0%, Gov intervenes by increasing AD so unemployment falls, inflation increases
•workers then ask for a pay rise equivalent to inflation= money illusion
•^ no actual gain, real output falls back to start
HOWEVER
•workers may incorporate inflation rate+ask for higher wages
•right shift in short-run Philips curve

Cycle continues!

Question 18

What is the definition of inflation?

Answer 18

A general increase in prices and fall in the purchasing value of money.