Unit 15: Inflation, Unemployment & Monetary Policy Flashcards
What is inflation?
A sustained increase in the general price level.
What is deflation?
A decrease in the general price level (negative inflation rate).
What is disinflation?
A reduction in the rate of inflation.
How is inflation measured?
By the percentage change in the general price level over time.
What is the Consumer Price Index (CPI)?
A measure of the cost of a representative basket of consumer goods.
What is the GDP deflator?
The ratio of nominal to real GDP, measuring prices of domestically produced output.
Why is inflation bad for fixed-income earners?
It erodes the purchasing power of their income.
Why can deflation be worse than inflation?
It delays spending and increases the real value of debt.
What is the real interest rate?
Nominal interest rate minus expected inflation.
What is the Phillips Curve?
A short-run trade-off between inflation and unemployment.
What is the bargaining gap?
The difference between the real wage firms are willing to pay and workers demand.
What happens when the bargaining gap is positive?
There is upward pressure on inflation.
What happens when the bargaining gap is negative?
There is downward pressure on inflation (deflation).
What shifts the Phillips Curve?
Changes in inflation expectations and supply shocks.
What is the inflation-stabilizing rate of unemployment?
The unemployment rate at which inflation is constant.
What is a supply shock?
An unexpected change in supply-side conditions that affects prices and employment.
What is a demand shock?
An unexpected change in aggregate demand.
What is monetary policy?
Actions by a central bank to manage the economy via interest rates and money supply.
What are the four transmission channels of monetary policy?
Interest rates, asset prices, profit expectations, and exchange rates.
What is the zero lower bound?
The idea that nominal interest rates cannot fall below zero.
What is quantitative easing?
Central bank purchases of financial assets to lower yields and stimulate investment.
Why is central bank independence important?
To maintain policy credibility and avoid political influence.
What is inflation targeting?
A central bank strategy to maintain inflation near a specified target.
