Week 5 - macroeconomic environment Flashcards
What is inflation
A continuous and persistent increase in aggregate prices
What is used to measure inflation
Consumer price indices or retail price indices over a 12 month period
Demand - pull inflation
Inflation that results from excess demand that cannot be matched by production
Cost - push inflation
results from an increase in production costs
Built - in inflation
Results from workers demand for wages that match the increase in the prices of goods and services
Real wage unemployment
wages above market clearing level, results in surplus of labour
Cyclical unemployment
disequilibrium unemployment caused by a fall in AD
What does the Phillips curve suggest
That there is a relationship between inflation rate and unemployment (the lower the inflation, the higher the unemployment rate)
Balance of payments
net balance of earning and payments arising from international trade over a given period of time
The impact of balance of payments
The balance of payments must be taken into account in setting monetary and fiscal policy at a national level
What can balance of payments data indicate
- pressure on the exchange rate
- be related to imposing or removing controls over external payments/transfers
What 3 things are the composition of the balance on payments
- current account
- capital account
- financial account
Current accounts
- captures imports and exports of goods and services
- captures wages, interest and profits flowing into and out of a country
Capital accounts
Records one change changes in the stock of assets
Financial accounts
- the purchase as rests of assets
- investment
flows to and from reserves
What are exchange rates
The rate at which a countries currency can be exchanged for another countries currency
Factors determining exchange rates
- price inflation
- balance of payments
- market psychology
- interest rates
Higher interest rates (demand attractiveness)
- attracts foreign investments because of higher returns on assets
- increase demand for the domestic currency
Lower interest rates (demand and attractiveness)
- reduce foreign investment appeal
- reduces demand for the domestic currency
What is carry trade
A strategy where investors borrow in a currency with low interest rates and invest in a currency with higher interest rates to profit from the interest rate differential
What is fiscal policy
Uses government spending and taxation to influence aggregate demand in the economy
What is the difference between fiscal policy and monetary policy
Fiscal policy involves taxation and government spending, monetary policy focuses on controlling the money supply
What does monetary policy aim to achieve
- maintain stable price
- control inflation
- control or moderate economic growth
- stabalise exchange rates
- reduce unemployment rates
