Chapter 2 - Macroeconomic performance

Question 1

What is economic growth?h

Answer 1

An increase in real GDP in an economy caused by an increase in AD and/or LRAS

Question 2

What are the benefits of using national income statistics i.e Real GDP as a measure of economic performance? 4

Answer 2

1) Report card for a country
Performance over time can be analysed, useful for politicians to see if objectives of macroeconomic growth are being met

2) Used to enact, inform and evaluate economic policy
Statistics provide crucial information regarding ouput and living standards so policy makers know what to do.
If real gdp is low ; expansionary demand side policies
If GDP is increasing rapidly with inflation side effects ; Supply side policies
Can use statistics to evaluate success of policies, allowing for succesful policies to be used again OR alternatives if havent worked

3) Build forecasting models
Individuals, business and Gov can use national statistics to forecast using for example extrapolation. To make policies, influence investment decisions and other important for other countries whos economic performance is interpendant

4) Benchmark to evaluate standards of living.
A rise in national income is interpretated as a rise in living standards for all, and if long term this is indicator of economic prosperity. Can comapre with other countries to compare effectiveness of policies

Question 3

What are some problems with using Real GDP as a measure of economic growth? 3

Answer 3

1) Large amount of data, varied sources, inaccuracies
This is why GDP figures are often revised

2) There exists an informal economy
This is unrecorded economic activity I.E unliscensed business, illegal activities, DIY work ETC.
Leads to inacurate unemployment figures and lower tax revenue, impacting gov spending
EXAMPLE = Italy and Greece estimated to have an informal sector of 25% GDP

3) Double counting in output method
Using output method to calculate real GDP is prone to error if primary sector output is double counted once manufactured in secondary sector; I.E mining of copper in primary sector, once sold adds to real GDP, then can be manufactured into copper wiring in secondary sector and is counted again.
To overcome problem, the final value of all goods and services is measured

Question 4

What are some problems with using Real GDP as a measure of living standards? 7

Answer 4

1) Only measure changes in income
Big flaw as living standards consist of alot more than just income; health, education, infrastructure, enviroment, gender equality, freedom.
Can be argued that composite indicators are more effective such as HDI

2) Only accounts for quantity of output, not quality
Doesnt account for existence of negative externalities; air pollution, resource degredation ETC. these reduce living standards and are not accounted for in GDP.
Can use ‘Green GDP’ instead, where enviromental costs of growth are taken away from figure. Problem is politcal sensitivity
EXAMPLE = India and China, resource delpetion and pollutio since 1990s

3) No info regarding distribution of income
Increases in Real GDP may only benefit small % of population ; growth from one dominant sector. Poor may see no improvements in standard of living at all and absolute/relative poverty will not change
EXAMPLE = Nigeria oil, Botswana Diamond

4) Some increases in output do not boose living standards, nature of good
I.E Defence related goods. GDP will increase but living standards will not

5) Using nominal rather than real exchange rates
GDP tends to be converted into USD to provide international comparisons, but to do so real exchange rates are not used therefore there is no adjustment for purchasing power.
EXAMPLE; India has lower GDP per capita than USA however given how cheap goods/services are in india then incomes can go alot further.
Therefore Real GDP per capita data must be calculated using PPP adjusted exchange rates to get a real comparison of living standards between countries.

6) Doesnt account for remmitance income (income earned abroad by domestic worker that is sent back to family)
Income earned abroad will not count towards that countries GDP despite coming from that countries factor of production and likely being sent back to the country, providing a boost to living standards

7) Multi National Cooporations
Will earn money where they are based BUT will send the money home, meaning their profits count towards the country where they are located’s GDP however that country will not see any imrpovements in living standards through re-investment, job creation ETC as the MNC will likely send money back to home.

Question 5

How can the problem of Remmitance Incomes nor being counted in Real GDP and MNCs profits being counted and not affecting living standards be overvome?

Answer 5

By using GNI, Gross National Income
This accounts for only the income generated by a countries factors of production, regardless of where they are. Therefore remitance income will be counted and MNC profit will not.

Question 6

Why would a decrease / increase in interest rates, weaken / strengthen the exchange rates?

Answer 6

Hot money inflows and outlfows

Question 7

What 2 diagrams can we use to show an increase in SHORT RUN economic growth?

Answer 7

see flashcard
A PPF curve with production moving toward final line
A Keynsian LRAS curve with AD shifting right towards Yfe

Question 8

What are some actions the Gov could take to increase short run economic growht? (boost AD) 5

Answer 8

1) A cut in interest rates
-Reduce cost of borrowing -> increased real disposable income -> increased C
-Reduces rate of return on savings -> reduces MPS
-Reduce monthly payments for tracker or variable rate mortgages -> increasing real disposable income -> increased MPC
-Reduce cost of borrowing for firms -> reach required RoR on investment projects easier

2) Reduce marginal rate of income tax for lower tax bands or increase tax free allowance
-Increase disposable income

3) Reduce level of cooporation taax
-Increased retained profit -> increase MPI

4) Increase Gov spending
-Infrastucture, education, healthcare ETC
G is compement of AD, boost AD, multiplier affect; initial increase in spending will increase incomes in the economy faciliting further rounds in spending and income generation.

5) Weaken exchange rate
-Reduce interest rates, increase hot money outflows with savers looking for places to get better return, decreasing demand for £
-Increase money supply
-Sell domestic currency reserves
-Weakened rate will WIDEC, boosting revenue from exports,reduce spent on imports

Question 9

What diagrams do we use to show an increase in long run economic growth?

Answer 9

see flashcard
PPC curve with shift in Curve, getting bigger
Classical model shift in LRAS

Question 10

What are some actions the Gov could take to increase LR economic growth? (LRAS)

Answer 10

1) Goverment spending on education
-I.E apprenteship schemes, re-training or school curriculam
-Improves skills and therefore productivity of labour, boost human capital, improving quality of factors of production

2) Government spending on infrastructure
-Transport infrastucture; building new roads, trains airports etc
-Reduces costgs of preoduction for firms, boosting efficiency, improving quality of factors of production

3) Offer subsidies or tax allowances to incentivise firms to invest
Incentive to spend on new capital, upgrade machinery, build new factories
-Boost quantity of factors of production, and quality

4) Reduce marginal rate of income tax
Increase incentive to work harder as less income will be taxed, increasing producitvity of labour force. Incentivises economically inactive to get into work, boosting quantitity

5) Reduce cooporation tax
-Increases incentive for firms to invest as they have greater level of reatined profits

6) Privatisation
Creates a profit motive in industry, improving efficiency and promotes DE and investment. Competition imrpoves static efficiencies that imrpoves quality of facotrs of production, profit motive will attract more entrepreneurs, boosting quantity

7) Deregulation
Reduces costs of production for firms aswell as increases competition, incentiviing efficiency, boosting quality of factors of production

8) Trade Liberalisation
Removal of trade barriers, promoting global competition, forces domestic producers to imrpove to compete, incentivising efficiency and boosting quality of factors of production

Question 11

What is the differnce between a demand side and supply side shock and what do they do?

Answer 11

‘Shocks’ refer to events that decrease AD or AS in an economy
Demand side = decreases AD (causes of recessions)
Supply side = decreases SRAS

Question 12

What are some demand side shocks? (5) What diagram do we use?
+ real life examples

Answer 12

Diagram = Keynsian LRAS with AD shifting left

1) Housing or stock market crash ; Consumption
Conusmers are less wealthy -> reducing willingess to spend/consume -> negative demand side shock -> reduces C -> reduces AD -> ‘taking economy that may have been growing steadily and operating close to full employmeny to an equilibrium where vast spare capacity exists’ -> negative output gap -> depressing price from P1 to P2 -> reduction in growth from Y1 to Y2 -> firms react by reducing production I.E reducting in GDP

2) Sudden fall in investment
Causde by reduced business onfidence, firms forseeing a reduction in growth. They hold back on investment, reducing I, reducing AD

3) Fall in spending abroad on exports
Reduced export revenues

4) High exchange rates
SPICED
Worsening of trade balance of current account -> reducing export revenue -> AD shifts left

5) Banking or financial crisis
Catastrophic, especially with integrated globalised banking systems.
Banks are important financial intermediateries that bring lenders and borrowers together.
Banks fail -> less lending to individuals and firms -> loss of savings -> loss of assetts -> decrease in C and I

Real life examples:
-Coronavirus pandemic in 2020 -> countires shut down parts of economy -> deep recesions world wide
-Financial crisis of 2008

Question 13

What are some supply side shocks? 2What diagrams do we use? + real life examples

Answer 13

diagram = classical model with shift left in SRAS, w no LRAS

1) Sudden increase in price of oil
Economy dependant on buying oil to fuel production -> increased costs of production for firms -> shifting SRAS left -> increasing cost push inflation -> STAGFLATION which si increases in infaltion beyond targets with decreases in growth

2) Rise in indirect taxes like VAT
Increased costs of production -> cost push inflation -> mayeb STAGFLATION

Real life examples:
-Germany entered recision in 2023, staglfation, caused byu increases in oil, food and energy prices due to Russia / Ukraine war

Question 14

What are the benefits to an economy from economic growth? (3) increases in GDP. What country can we apply benefits of growth to?

Answer 14

1) Incomes rise
Because unemploymet falls as labour is derived demand -> wage bargaining is strong -> with higher profits firms are willing to accept higher wages -> material and non-material standards of living increase -> mulitplier effect of consumer spending can cause further increase in economic growth

2) Higher profits for firms
With more demand and higher incomes, firms can sell more, increasing revenues and profits. -> higher retained profits -> DE -> boosting Sr and LR economic growth

3) Fiscal dividend increase for the government
Greater tax from income tax, cooporation tax and expenditure tax like VAT -> more imports being sucked in, more tariff revenues -> greater fiscal dividend -> deleverage antional debts -> spending to tackle income inequality -> enabling SR and LR growth overtime

Country: China ; job creations, profits, fiscal benefits

Question 15

What are the costs of economic growth? 5

Answer 15

1) Accerated deman pull inflation
-If AD is increasing faster than AS, there will be excessive pressure on existing factors of production, increasing demand pull inflation
Costs of inflation: Loss of international competitiveness, a fall in purchasing power, erosion of savings

2) Negative externaltities not accounted for
Increases in gorwth through increase in real GDP only account for quantity of output, not quality. The exisitence of negative externalities in production such as air pollution can lead to reduced living standards

3) Income inequality
Increases in GDP doiesnt mean incomes for all of society are increasing, could be one dominant sector therefore only those from that sector are beneftiing from the growth. Corrupt governance may prevent equal distribution of income, no improvements in lviing standards -> no improvenet or worseingin of income inequality and poverty

4) Rising incomes is only one part of living standards
Big flaw as living standards consist of alot more than just income; health, education, infrastructure, enviroment, gender equality, freedom.
Can be argued that composite indicators are more effective such as HDI

5) Can create/widen current accoun decifit
Higher inflation makes exports less internatioally competitive, reducing export reveneu, whil increasing sucking in of imports
Macroeconomic objective of balance of trade could be lost and problems with a current account deficit may occur.

Question 16

What are the 3 evaluation points for Pros/cons of economic growth?

Answer 16

Baso how to make growth be good

1) Growth should be sustainable.
Without excessive inflationary pressure, without significant enviromental costs andiwhtout rtisk of resource depletion. Allowing future genrations to continue to benefit

2) Growth should be inclusive.
ALl citizens in economy shoudl benefit. Non-0corruopt governance essentiual

3) Growth should be sustained.
Where growth continues ovetime with no sharp contractions. Gowth must be balances, not confined to one sector and must come from both demand and supply side, ensuring any shocks can be absorbed.

Question 17

What is unemployment?

Answer 17

Those of a working age who are willing and able to work but cannot find a job despite an active search

Question 18

What is the Labour Force Survey?

Answer 18

Survey of unemployment carried out quarterly in the UK, surveying 44,000 households

Question 19

What are some problems with the LFS measure of unemployment? 5

Answer 19

1) The Hidden Unemployed
Inidividuals who have been actively looking for work for a long period of time and have become discouraged from constant rejections and have therfore stopped looking for work.
They will be missed by official unemployment statistics, forming part of economically inactive

2) Other inactive groups
Individuals who are not willing to work for a variety of reasons;
adult carers for sick relatives, the early retired and those living off their spouses income. Not included in unemployment rate (as not looking for work) depsite being of worling and age and being a clearly unemployed productive resource in economy

3) The under-employed
Those who want to work full time but are actually working less than this. Part-time, 0 hour contract hours, want to work fyll time but are not…these are classed as fully employed according to official unemployment figures

4) Disparities
The LFS give no indication of of potential disparities in age, gender, race and geogrpahy. For example there m,ay be high youth, female hyspanic unemployment etc… whichb would be indiciative of labour discrimination and other underlying problems in the economy which would require government intervnetion

5) Cost, small sample
The admin costs of issuing the LFS are high, menaing survey cannever cover all households in economy. Sample may casue sampling error in attempting to generalse the unemployment rate to whole economy

Question 20

What is cyclical unemployment? What diagram do we use?
explain more

Answer 20

AKA, Demand-Defficient/Keynesian Unemploymeny

Diagram = Keynesian LRAs with AD shfit left
Occurs when in recession phase of economic cycle, when AD shifts left, large negative output gap.
Demand side shock (housing market crash) -> Reduction of Consumption -> Reduction in AD -> Reduction in growth -> recession from Y1 to Y2 -> reduced infaltionary pressure from P1 to P2 -> Labour is a derived demand -> firms reduce production -> cyclical unemployment spikes -> to maintain profitability in recesion when revenues are falling, firms further reduce employment

Question 21

What is Real Wage unemployment? What diagram do we use?

Answer 21

Minimum wage diagram showing unemployment AB
Occurs when wages are above the equilibrium wage rate in the labour market.
Could be because of higher minimum wages set by gov to protect living standards of poorest in society, or TU

Increased supply of workers -> decreased demand, possibly lay offs as costs of production for business has increased -> excess supply -> unemployment

Question 22

What is structural unemployment?

Answer 22

The immobility of labour due to long-term changes in the structure of an industry.

A mismatch between the skills of workers and the vacancies that exist in the economy = Occupational immobility of labour

Workers are willing to work at the given wage rate and have the skills to do so but are unwilling to move to the locations where these jobs exist = Geographical immobility of labour

Question 23

What occurences in an economy can cause structural unemployment?

Answer 23

1) Changing of an industy that makes skills redundant
For example ; A country losing its comparative advantage in production in a given industry.
REAL LIFE EXAMPLE = UK used to be a major textile production, specialising, howvever big foreign competiton came from East Asia, lost advantage, workers with these skills in UK lost jobs, resulting in occupational imobility

2) Technological advancements
Changing nature of given industry, making human capital redundant in certain areas. Workers dont have appropiate skills to transfer
REAL LIFE EXAMPLE = Automotive industry where robotics has taken many jobs / supermarkets and self checkouts

3) Education
In developing countries there is very unequal education opportunities, especially for the poor in rural areas. Quality of education may be weak.
Poor education -> occupational imobility of labour

Question 24

What is frictional unemployment?

Answer 24

When workers voluntarily leave a job and look for another, or are currently looking for work and rejecting jobs being offered.

Question 25

What is seasonal unemployment?

Answer 25

When there is a temporary fall in demand for labour as a result of seasonal factors; tourism industry

Question 26

What is the natural rate of unemployment and why does it occur? What is the diagram

Answer 26

See flashcard for diagram
The natural rate of unemployment demostrates the unemployment that will exist when the labour market is in equlibrium.
This is caused by structural, frictional and seasonal unemployment, meaning 0% unemployment can never be achieved.

Explain diagram:
Equlibirum in labour market is derived from where the actual supply of labour equals demand for labour: W1, Qfe
rather than where labour force supply curve (SLF), which includes all workers willing to work.
At wage rate W1, Q1 workers are willing to take jobs but only Qfe do due to structural, frictional and seasonal factors. The difference between them, a-b, represents the narutral rate of unemployment.

Question 27

What are the determinants of the natural rate of unemployment? 4

Answer 27

1) Excessive government intervention in the form of generous benefits and high rates of income tax.
These encourage frictional, structural and seasonal unemployment.
They distort incentives in labour market away from work and toward remaining unemployed -> individuals can afford to take as much time as they need to find a job / stay out of work when seasons change prolonging frictional and seasonal.
Workers lack incentive to take jobs in areas they do not favour and/or to become trained -> prolonging structural unemployment

2) Excessive labour market regulation can increase and maintain high levels of structural unemployment
Strict hiring and firing laws and minimum wages limit incentive for firms to take risks when employing workers w/o necesary skills/experience -> increasing structural unemployment
If laws were lax -> maybe firms hire and train up workers

3) Under provision of transport and affordable, high quality housing infrastructure in free market
Driver of geographical immobility -> structural unemployment
Caused by under provision of public goods and under provision of merit goods in free market

4) Under provision of work training schemes
Left to free market -> work training under provided due to firms ignoring positive externalities in production -> structural unemployment
Goverment intervention such as subsidised work training schemes are necessary to reduce natural rate of unemployment

Question 28

What are the costs of unemployment? 6
Need abit more depth

Answer 28

1) Lost ouput = lower GDP and CS
Workers are productive resources in economy -> high unemployment = economy under utilising factors of production -> producing less than potential output -> lower growth rates -> Consumers have samller range of goods/serivces -> decreases in CS

2) Deterioration of government finances
Budeget deficits and national debt rising
Increased unemployment -> increased Gov spending on automatic stablisisers in place in developed countries -> benefits , welfare payments -> increased spending on dealing with social costs; police services, health services, judicary services -> ALSO -> decreased tax revenue -> income, VAT
-Debt fueled government spending will be neede to tackle costs of unemployment with less tax revenue -> burdening future genrations -> cuts in other areas -> regressive policies -> progressive taxes -> laffer curve

3) Costs to other economies
Domestic incomes lower -> less spending on imports -> other economies lose revenue

4) Social Costs
Higher crime rates, rioting, protests, mnarital and family breakdowns, mental health problems.

5) Lost income
Unemployment -> lost income stream -> reduction in C -> reduction in AD -> reduction in growth

6) Hysteresis
Most dangerous consequence of unemployment, occuring when unemployment becomes long term.
Longer someones out of work -> greater loss of skills and human capital as they become detatched from working enviroment -> skills possesed may become outdated ->unemployed adjust their standard of living to lower -> labour supply permanently lower -> harmiing future potential growth rates -> LRAS decreases -> AD decreases

Question 29

What are the benefits of unemployment? 3

Answer 29

1) Easier for frims to find workes
Larger potential pool -> more choice for firms -> moreliekly to pick most suitable workers -> increasing productivity and log term profitability

2) Workers can take time in finding suitable job
This imrpoves happiness of workers and productivity for firms

3) Can help keep inflation under control
Lower incomes -> less C -> lwoer levels of AD -> demand pull inflation low and stable
More unemployment -> lower bargaining power of workers -> wage growth low -> cost push inflation low
Helps governments meet one of their macroeconomic objectives

Question 30

What are the evaluation points for unemployment? 4

Answer 30

What makes unemployment good or bad
1) Level of unemployment
AT natural rate is not a concern, benefits outweigh costs. When beyon natural rate, costs are severe and otweigh benefits

2) Duration of unemployment
Longer it lasts, longer and worse the consequences get, higher risk of hysteresis

3) Type of unemployment
Structural is worst type due to deep rooted nature making it long lasting and difficult to solve
Structural unemployment -> risk of lasting in long term -> hysteresis -> recession -> cyclical unemployment
Cyclical not so bad BUT can create structural with workers becoming deskilled overtime
Frictional is least concerning and can be healthy with workers ettling where they will be most productive

4) The distribution of unemployment
Who is unemployed.
High youth unemployment is most dangerous as they have highest productive potential and are big contributers to future tax revenues -> much greater risk of hysteresis

Question 31

What is inflation?

Answer 31

The perisistent rise in general prices of goods and services in an economy in a year

Question 32

How is inflation measured using the Consumer Price Index (CPI)?

Answer 32

Sorts through a large collection of survey data to determain a ‘basket of goods and services’ that reflects the consumer habits of an average household in a nation -> These goods and services are weighted based on the % of income spent on them -> Average price of good is then multiplied by its weight to provide weighted price -> Weighted prices are summed to give total weighted price of basket -> A base year is selected, given the index number of 100 -> Annual changes are indexed and compared to base year with a % change -> this % represents the inflation for that year.
Each year basket of goods is updated to reflect cosumer habits and weights are changed where needed.

Question 33

What are some problems with using CPI to measure inflation? 4

Answer 33

1) Basket of goods will not necessarily reflect consumption habits of all consumers in economy.
Everyone doesnt purchase same goods OR spend same proportion of income I.E High income and low income earners = different goods, different proportions, like foreign holidays. If these increase in price, would not be reflected in inflation

2) Prone to seasonal fluctuations
Can drastically influence prices of key goods and services that are weighted heavily and may therefore contribute to inflation.
A very cold winter may artificially push up gas prices which will increase inflation yet these are seasonal factors that do not represent the underlying trend in prices throughout the rest of the economy
FOR THIS REASON ‘core inflation’ is usually used alongside CP, which excludes food, gas, electricity and fuel

3) Basket must be changed regularly to accurately keep up with changes in consumption habits of nation
If this is not done, due to financial pressures OR not done correctly, inlfation figures may not be representive of current consumer habits

4) Housing costs not included
Big flaw as housing costs constitute a large proportion of household spending and contribute greatly to the cost of living for many.
CAN BE OVERCOME by using CPIH, which includes owner occupied housing

Question 34

What diagram do we use to show demand pull inflation?

Answer 34

Keynesian with ad shift right

Question 35

What are the causes of demand pull inflation 5

Answer 35

What shifts AD right

1) Cut in interest rates
-Reduce costs of borrowing -> increasing C
-Reduces rate of return savings -> decreasing MPS
-Reduce monthly payments for tracker or variable rate mortgages -> increasing C
-Reduce costs of borrowing for firms -> closer ROI -> increasing I

2) Reduced marginal rate of income tax for lower income bands or increase tax free allowance -> increasing disposable income -> increasing C

3) Reduce cooporation tax -> increase I

4) Boost government spending; infrastructure -> increasing G -> large multiplier effect facilitating further rounds of spending -> increasing AD more

5) Weakening exchange rate -> increased X decreasing M

ALL OF ABOVE PUT MORE PRESSURE ON EXISISTING FACTORS OF PRODUCTION, INCREASING THEIR PRICE AND COSTS FOR FIRMS, FEED THROUGH TO HIGHER PRICES IN ECONOMY

Question 36

What are the causes of cost push inflation? 4

Answer 36

What shifts SRAS left

1) Increase in rax material prices like oil

2) Wages increase I.E min wages, TUs

3) Indirect taxes like VAT increase

4) Higher prices of imported raw materials

Question 37

What diagram do we use for increase in cost push inflation?

Answer 37

Classical with SRAS shifting left, no LRAS

Question 38

What are the costs of inflation? 8

Answer 38

1) Purchasing power falls
Due to a decrease in real incomes if they do not rise in line with inflation. Decreasing C in economy, decreasing AD

2) Savings are eroded in value
Those that are earning a RoR less than inflation rate, they are falling in real value. Reduce incentive to save -> reduce loanable funds available for banks -> less money to issue to business for investment -> depressing SR and LR economic growth
‘SHOE LEATHER COSTS’ = The loss of income from the time spend by consumers looking for a better place to store their money
REduces safety net for households

3) Reduced international competitiveness
Inflation increases -> price of exports increases -> worsening CA position -> imports also become more competitive

4) Anticipated inflation causing inflation spirals
If anticipated -> workers demand higher wages to compensate for fall in purchasing power -> increawing costs of production for firms -> passed on as higher prices for consumers.
ALSO consumers who antipate inflation will bring forward their spending -> increase C -> increaseing AD -> increasing INflation further

5) Menu costs
With constant changes in price, there are costs involved in remaking menus, catalouges and labels -> firms increase prices to cover increase in costs

6) Fiscal drag
Workers recieve higher wages to cover inflation BUT this pushes them into higher tax bracket in a progressive tax system that is not adjusted for inflation -> Making them wrose of then before -> unfair -> distorting incentives

7) Lower funding for public services and public sector wages
If gov spending on public services and public sector wages DOESNT RISE WITH INFLATION, in real terms this is a fall in spending -> lower living standards of those on public sector wages and lower wuality of public services

8) Inflationary noise
Price acts as signals in economy regarding scarcity of a given produc aswell as the utlity consumers place on a good/service.
If constant rises in inflation make price volatile, individuals and business will loss faith in price signaling function -> Can put consumers and businesses off investing -> hampering LR and SR economic growth

Question 39

What are the benefits of inflation? 5

Answer 39

1) Workers can receive increase in pay
Even if it onyl matches inflation, will keep productivity and motivation high, maintain strong level of conusmer spending

2) Goverment finances improve
HIgh fiscal intake -> if gov spending in real terms does not rise = acts as a cut in gov spending -> imrpoving fiscal position of Gov -> reducing need to borrow and run large budget deficits -> maybe allowing for more generous taxation and spending plans

3) Inflation will decrease the real value of debt
Because debt is fixed, wheras wages rising inline with inflation will make it easier to service fixed levels of debt.
Firms retained profits could increase
Goverments could be earning more tax revenue -> making it easier to service their debts
Reducing risks of financial crisis and burdens of debt

4) Benficial if low and stable, caused by AD increases
Ebcourages firms to increase output knowing they can increase revenues -> encourages consumers to buy whenevr they need rather than delaying pruchases waiting for deflation

5) During recesion can allow firms to keep their workforce size and maintain profitability
Can increase prices by inflation but increase wages by less, maintaining profitability in a recession as workers happy to recieve a raise even if not inline with inflation

Question 40

What are the evaluation points for inflation?

Answer 40

What makes inflation good or bad?

1) The cause -demand pull or cost push?
Cost push is follwed by a fall in real GDP leading to stagflation, worse than demand pull, which if controlled can be healthy

2) The actual rate
HIgher rate, worse the consequences

3) The stability
The more volatile, the worsening of inflationary noise

4) Anticipated vs unanticipated
Anticipated high inflation is very dangerous where wage-prioce spirals and consumer price spirals are more likely, difficult for economy to get out of