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34 Cards in this Set

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There is a trade-off between

inflation and unemployment due to the inverse relationship between the two

The greater the rate of growth of AD:

the greater the resulting inflation and GDP and the lower the unemployment level

The slower the rate of growth of AD,

the lower the resulting inflation and GDP and the higher the unemployment level

Fiscal and monetary policies act on

AD and not on the labour market imbalances and market power

Two complications that face policymakers are

The reversibility problem (ratchet effect) and the shiftability of the AS curve

The phillips curve plots

inflation on the Y and unemployment on the X

The simultaneous occurence of unemployment and inflation is known as

stagflation

Staglation and the Phillips curve

conflict in their relationships between unemployment and inflation

Causes of stagflation include

Aggregate supply shocks such as severe increases in fuel costs or the devaluation of the AUD

Two other Causes of stagflation are

Productivity decline and inflationary expectations and wages

These causes shift

the AS curve left

The natural rate hypothesis suggests

that there is a unique level of unemployment around which observed unemployment will fluctuate

Long run stability in the NR hypothesis corresponds with

the full employment rate of unemployment

The two variants of the natural rate hypothesis are

the theory of adaptive expectations and the rational expectations theory

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

The adaptive expectations theory suggests what kind of phillips curves?

linear downward sloping short run phillips curves and a vertical long run phillips curve

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.

The rational expectations theory argues that government measures to increase employment

will only result in accelerating rates of inflation

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

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

Demand pull inflation occurs when

An increase in AD pulls up the price level

During demand pull inflation in the short run

there are increased prices and real output

In the long run considering demand pull inflation:

the economy has moved along the vertical aggregate supply curve

Cost push inflation occurs when there is

a decrease (left shift) in the short run aggregate supply curve

In the short run during cost push inflation there are

increased prices and decreased real output and more unemployment

In the long run when considering cost push inflation the government may

intervene or not intervene

If the government intervenes during cost push inflation by increasing AD

This solves unemployment/output problems but causes an inflationary spiral

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

Two categories of non-demand policies to address cost push inflation are

Market policies and wage-price (income) policies

Labour Market Policies

Aim to better match workers to jobs thus reducing labour market imbalances or bottle necks

Three employment programs include

Vocational training, job information and non discrimination policy

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

Wage guideposts or controls

manage wages so as to shift AS

Price guideposts or controls

manage prices so as to shift AS