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25 Cards in this Set

  • Front
  • Back

Inflation

A sustained increase in the general price level




2-% on average over the business cycle

Consumer Price Index (CPI)

Data collected by the ABS from capital cities for consumer good which are typical of a household budget. The products measured are known as the basket and each one is assigned a number or weighting indicating how important it is in terms of average consumer spending patterns

Inflation rate

New-Old/Old x 100

Underlying inflation rate

Obtained by excluding those entries which are considered to seasonal, erratic or policy influences

Limits of CPI

Outside metro area not considered


Slow to reflect changes


Does not reflect substitutions


Does not consider quality changes

Demand-pull

This occurs when aggregate demand is increasing faster than firms can expand their output. This causes the price level to rise

Cost-push

The occurs when rising costs of production are passed on to consumers in the form of higher prices with increasing costs of production causing aggregate supply to decrease

Output effects of inflation

Undermine business confidence


Affect competitiveness


Distorts pattern of resource allocation


Reduces real incomes

Redistribution effects


Winners during high inflation

Those with a high degree of market power


Net borrowers


Those who own significant assets

Redistribution effects


Losers during high inflation

Those on fixed incomes


Net lenders


Those who don't own significant assets

Unemployment

Refers to those people who are willing and able to work, are actively seeking work but don't currently have a job

Labour force

All those aged 16 years or over but not yet retired who are either employed or unemployed

Labour force does not include

Full time students


Those unwilling or unable to work


Those under 16 and retirees

Factors affecting size of the labour force

Population


Work incentives: Income tax cuts


Confidence in getting a job


Immigration of skills employees

Unemployment Rate

Unemployed/labour force x 100

Factors affecting size of labour force

Underemployment not calculated


Must work more than one our in the week to be considered employed


Less than 1% households surveyed for labour force data


Some may give false information

Frictional Unemployment

Unemployment due to people experiencing changing economic circumstances


E.g People moving between jobs

Seasonal Unemployment

Unemployment due to industries experiencing seasonal downturns


E.g Ski instructors

Structural Unemployment

Unemployment due to changes in the structure of the economy


E.g People losing jobs due to tech changes

Long term Unemployment

When someone has been technically unemployed for longer than 12 months (aka hardcore)

Cyclical Unemployment

Unemployment that occurs as a result of falling levels of economic activity. As AD falls, profit maximising firms revise their production plans downwards and lay off workers

Natural rate of Unemployment

The level of unemployment that is consistent with zero cyclical unemployment

Costs of Unemployment on the economy

Decreased confidence (decreased AD)


Not maximising output (decreased SOL)


Decreased disposable income


Decreased economic activity


Increased govt spending

Private costs of Unemployment

Increased rates of physical and mental illness


Increased relationship breakdowns


Social stigma


Increased crime rates


Increased alcohol and drug abuse

Consequences of full employment

Opposite to the costs of unemployment on the economy