Unemployment, inflation and output gap

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  • Created by: charlie
  • Created on: 04-05-16 11:57
US Roaring 20s
BOOM ! / high growth = low unemployment / low infl (deflation) but rises when unemployment falls, still stays relatively low
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US Great depression CAUSES
1928 stock prices inc = FED inc IR = inc infl spec = inc infl
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US Great depression EFFECTS
lowered investment and consump/ dec durable goods/ less confidence/ Bank run (insolvent=no cash)/ loans to farmers default/ real GDP fall/ Defl good prices
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US Great depression 3 SOLUTIONS
Fiscal / Monetary / US leaves gold standard 1931 (UK leaves=speculation of US leaving/ $ sold for gold = devalue of currency)
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N / U / L / u
employment / unemployment / constant labour force / unemployment rate
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u (overstate/understate)
overstate (people confident about job but not accepted)/ understate (people discouraged/stopped looking)
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Participation rate
how many want to work
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Unemployment rate
how many in labour force without a job
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Frictional unemployment
employers want you but you question whether you should take next best option
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Structural unemployment
you want the job but employers question whether they should take next best option
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f / s
rate of finding a job / rate of job separation
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Cyclical unemployment
created in recession, when unemployment greater then natural rate/ most dangerous/ not enough demand for labour
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bath tub model: equation
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Beveridge curve
extent of mismatch in labour market / -ve relationship between unemployment rate + vacancy rate / closer to (0,0) = more efficient as more adaptable/efficient/info
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Consumer price inflation (CPI): equation
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Inflation: equation
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Zimbabwe 1980-2008, Hyperinflation: Causes
weather weakened tobacco economy=output fell/ borrow + consume/ protests=no tax inc/ money printing + civil war spending
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Zimbabwe 1980-2008, Hyperinflation: Effects
inc infl / massive depreciation US$1=Z$4M/ stagnant + unstable economy (money chasing few goods)/ 2009 abandon currency/ waves of emigration/ black market
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Japan 1980's-1990's, Deflation: Causes
recession/ low overnight call rate (low base rate=low CB IR trying to better spending)/ mass invest in physical stock (thinking will improve)/ stock market inc (asset bubble)/ high GDP growth/ inc IR to prevent overheating/ bubble crashes
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Japan 1980's-1990's, Deflation: Effects
Banking crisis (collateral value fell=bank debt=still lending=bad loans)/ Recession/ Deflation SPIRAL (property value fell/ no investment/ inc. savings/ consump postponed/ unemploy)
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trend growth rate equation
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avg growth rate equation
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Economic growth long run
economy grows exponentially/ LOG of GDP per capita, growth rate=slope
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Output gap (short run) equation
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Quantity theory of money (QTM) equation
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QTM 3 assumptions
classical dichotomy Y=Y(Y exogenous + constant change rate/ LT output at potential not affected by money)/ Constant velocity V=V(V exogenous+constant/ no time growth rate=0) Money supply M=M(exogenous+constant change)
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M / V / P / Y
money supply /velocity of money (avg transactions to occur) /consumer price inflation CPI (not exogenous) / Real GDP
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QTM conclusion: long run
key determinant of price level is money supply
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QTM+inflation equation
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QTM+inflation characteristics
output growth rate constant in LT/ money growth rate controlled CB
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QTM+inflation conclusion: long run
changes in growth rate of money lead 1-for-1 to changes in infl rate/ infl is always monetary phenomenon
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Evidence that inflation follows money: Zimbabwe
people spend depreciated cash immediately=velocity inc=inc stock of money printing=hyper infl
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Evidence inflation doesn't follow money: QE
money supply>CPI / CB purch gov securities (or others from the market) which lowers IR and inc money supply
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Evidence inflation doesn't follow money: Germany
hyperinflation/ infl kept rising despite lowered money supply/
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Okun's law
negative relationship between output and unemployment
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Okun's law: growth version symbols
change in unemployment / okuns coefficient (magnitude of relationship) / growth rate of output (year t-1 to t) / growth rate for no change in unemployment (normal growth rate)
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Okun's law: growth version - why does unemployment decrease more than employment increases?
labour force participation inc due to rising population / inc working age length / emancipation of women
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Okun's law: gap version equation
links unemployment gap to output gap
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Okun's law: gap version + Phillips curve symbols
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Philips curve
negative relationship between inflation and unemployment
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Phillips curve history
pre 1975 (PC resolved puzzle inc change wage=dec unemployment, tradeoff with reducing unemployment=cost of inc infl (no shifts on movement along curve) / post 1975 (PC curve shifts out, move to infl targeting as PC unstable)
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2 explanations for PC shifts: OIL SHOCKS
higher costs=higher prices and unemployment doesn't necessarily change, (DIAGRAM)
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2 explanations for PC shifts: CHANGE IN EXPECTATION FORMAT
pre 1960's infl expected = 0 (fluctuates -ve/-ve) / post 1960's infl +ve constantly
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Friedman + Phelps
appearance of trade off between unemploy + infl was illusion (infl kept rising but unemployment steady)/ no permanent tradeoff only ST (in LT EQM expected=actual) / expectations matter
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Phillips curve equations
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Other cards in this set

Card 2


US Great depression CAUSES


1928 stock prices inc = FED inc IR = inc infl spec = inc infl

Card 3


US Great depression EFFECTS


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Card 4


US Great depression 3 SOLUTIONS


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Card 5


N / U / L / u


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