Unemployment and Inflation
- 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/** 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.
- T and V are not constant!
- MV=PT; M=MS, V= velocity of circulation of money; P=PL, T= total transactions in the economy.
- 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.
- 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.
- Who are unemployed?
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