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34 Cards in this Set
- Front
- Back
There is a trade-off between |
inflation and unemployment due to the inverse relationship between the two |
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The greater the rate of growth of AD: |
the greater the resulting inflation and GDP and the lower the unemployment level |
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The slower the rate of growth of AD, |
the lower the resulting inflation and GDP and the higher the unemployment level |
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Fiscal and monetary policies act on |
AD and not on the labour market imbalances and market power |
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Two complications that face policymakers are |
The reversibility problem (ratchet effect) and the shiftability of the AS curve |
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The phillips curve plots |
inflation on the Y and unemployment on the X |
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The simultaneous occurence of unemployment and inflation is known as |
stagflation |
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Staglation and the Phillips curve |
conflict in their relationships between unemployment and inflation |
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Causes of stagflation include |
Aggregate supply shocks such as severe increases in fuel costs or the devaluation of the AUD |
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Two other Causes of stagflation are |
Productivity decline and inflationary expectations and wages |
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These causes shift |
the AS curve left |
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The natural rate hypothesis suggests |
that there is a unique level of unemployment around which observed unemployment will fluctuate |
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Long run stability in the NR hypothesis corresponds with |
the full employment rate of unemployment |
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The two variants of the natural rate hypothesis are |
the theory of adaptive expectations and the rational expectations theory |
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The theory of adaptive expectations suggests that |
people form their expectation of future inflation based on previous and current rates of inflation and that there is a short run tradeoff between unemployment and inflation but in the long run there is none |
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The adaptive expectations theory suggests what kind of phillips curves? |
linear downward sloping short run phillips curves and a vertical long run phillips curve |
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The rational expectations theory suggests that |
increases in money wages lag behind increases in the price level, giving rise to temporary increases in profits and employment. |
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The rational expectations theory argues that government measures to increase employment |
will only result in accelerating rates of inflation |
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New classical policy implications suggest |
price levels may upset short run but the LR is stabke and long run occurs very quickly (instantaneously) so government intervention is not endorsed |
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Modern Keynesian policy implications suggest |
markets are not highly competitive, wage adjustments are slow and stabilization policies are required to reduce the severe costs of unemployment or inflation |
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Demand pull inflation occurs when |
An increase in AD pulls up the price level |
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During demand pull inflation in the short run |
there are increased prices and real output |
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In the long run considering demand pull inflation: |
the economy has moved along the vertical aggregate supply curve |
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Cost push inflation occurs when there is |
a decrease (left shift) in the short run aggregate supply curve |
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In the short run during cost push inflation there are |
increased prices and decreased real output and more unemployment |
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In the long run when considering cost push inflation the government may |
intervene or not intervene |
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If the government intervenes during cost push inflation by increasing AD |
This solves unemployment/output problems but causes an inflationary spiral |
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If the government doesn't intervene during cost push inflation |
Severe recession will result however in the long run AS will return and shift to the right |
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Two categories of non-demand policies to address cost push inflation are |
Market policies and wage-price (income) policies |
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Labour Market Policies |
Aim to better match workers to jobs thus reducing labour market imbalances or bottle necks |
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Three employment programs include |
Vocational training, job information and non discrimination policy |
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Wage price policies are |
government policies in the labour and product markets that are designed to constrain both nominal incomes and prices paid in order to influence real income, can be controls or guideposts |
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Wage guideposts or controls |
manage wages so as to shift AS |
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Price guideposts or controls |
manage prices so as to shift AS |