Unemployment and Inflation

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  • Created by: HAYL
  • Created on: 10-04-15 07:45
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  • Unemployment and Inflation
    • Who are unemployed?
      • Inactive, working age but not working; part-time job, early retirment, housewives.
      • 2008 recession caused unemployment to increase from 1. mill to 2.62 mill in 2011 measured by LFS.
    • Frictional/ structural unemployment
      • Frictional; time lag between moving jobs, this alwasy occurs even when at 'full employment'.
      • Structural; decline of industries un able to adapt; workers have wrong skills- growth of international competition has played a role.
    • Keynesian Unemployment;
      • Demand deficient e.g. cyclical.
      • Mostly not used theory not but 2008 recession could be an example.
    • Consequences of unemployment;
      • - Waste of human capital
      • Some U is urged necessary for the economy to function; downward pressure of wages, reduce inflationary pressure.
      • Widens Y differentials.
      • Increase absolute and relative poverty.
      • Increase gov spending; OC
    • Free Market/SS approach to decrease U;
      • Cut state involvement; set markets free.
      • Role of Gov is to control inflation, promote competitive markets and maintain rule and order to allow MM to function properly.
      • Encourage competition private sector, an enterprise culture=econ growth, reduced U.
    • Keynesian approach to reduce U;
      • Say deficient AD casued slow recovery to 2008 recession.
    • Inflation; a persistent or continuous rise in the PL or fall in the value of money.
    • Qty theory of money (monetarists);
      • Gov expands MS at greater than the increase in real national output. As a result households and firms hold excess money balances which, when spent, increases PL. Given that in the SR real output cannot expand in line with increased spending power.
        • T and V are not constant!
          • MV=PT; M=MS, V= velocity of circulation of money; P=PL, T= total transactions in the economy.
      • MV=PT; M=MS, V= velocity of circulation of money; P=PL, T= total transactions in the economy.
    • Consequences of inflation;
      • Depends whether anticipated or not. Arguably necessary for low inflation for expansionary policies to reduce U.
      • Distributional effect;
        • Weaker groups in society on fixed Y loose. May cause -ve IR; lenders pay borrowers, Increase investment, inflation= hidden tax, redistributing Y+wealth from lenders to borrowers.
      • Distortion of normal econ behaviour;
        • Seculation. Consumers buy lots thinking it will accelerate or put off spending if deflation.
      • Breakdown in the functions of money;
        • In hyperinflation, less efficient barter replaces the use of money and imposes extra costs on most transactions.
      • International uncompetitiveness;
        • If inflation is higher than competitor countries, exports may increase in price, puts pressure on fixed exchange rates.
        • Floating exchange rate, the exchange rate falls to restore competitiveness, but rising imports cause another inflation.
      • Shoe leather and menu costs;
        • Consumers have shoe leather costs; spending time and effort looking around to see which costs have and have not risen.
        • Firms may have menu costs; have to adjust price lists more often.
    • Keynesian D-pull inflation;
      • Increased consumer spending and borrowing.
      • Tendancy to increase public spending and budget deficit in order to win election.
    • Keynesian C-Push inflation;
      • Wage C-push, import C-push
      • TU activity(increase wage), bargain to increase wage in excess to rise in labour productivity.
      • Collective bargaining.
      • Cost-plus pricing with monopolistic films.
      • External shocks; oil, food, commodities e.g. coffee though the underlying of these shocks is excess AD.


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