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Flashcards in inflation - causes and cures Deck (42)
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1
Q

what is the definition of money ?

A

anything which is generally accepted in exchange for goods and services and in the settlement of debt

2
Q

What is the medium of exchange ?

A

An instrument that is accepted in exchange for goods and services

3
Q

What is store of value ?

A

An instrument ehich allows people to defer purchasing poer to the future

4
Q

What is a unit of account ?

A

An instrument that allows us to measure the values of different goods and services

5
Q

What is the monetarist view of money summarised by ?

A

Inflation is always and everywhere a monetary phenomenon in the sense thst it can be produced only by a more rapid increase in the quantity of of money

6
Q

What is the traditional quantity theory of money ?

A

MV = PY

7
Q

What does M stand for ?

A

Nominal money supply

8
Q

What does V stand for ?

A

The income velocity of circulation of money during a given time period

9
Q

What does P stand for ?

A

The average price of final output

10
Q

What does Y stand for ?

A

The real quantity of final output produced during a given time period

11
Q

What does narrow money mean?

A

Notes and coins in circulation plus reserve balances held by banks at the central bank

12
Q

What does broad money mean ?

A

notes and coins plus a range of deposits held by individuals, firms and other organisations in banks and similar financial institutions

13
Q

What does reserve requirements mean?

A

the minimum amount of reserves banks must hold against deposits

14
Q

What does open market operations mean

A

The purchase and sale of government bonds by the central bank

15
Q

What does base rate mean ?

A

The interest rate on loan the bank of england makes to the banking sector

16
Q

What is the modern quantity theory of money ?

A

P = M - Y

17
Q

What does the modern quantity theory of money mean ?

A

The policy means that the authorities should seek to control the rate of growth of the money supply in line with the underlying rate of growth of real output in order to ensure long-term price stability

18
Q

What does the traditional quantity theory of money meN ?

A

the authorities controlled the nominal supply of money in the economy
the income velocity of money depended on institutional factors - e.g. the length of the payments period. It was also thought to be constant
The level of real output was determines by real forces such as the supply of factors of production.
Output would return to full employment in the long run .
Y would be constant at the full employment level of output

19
Q

What is the Phillip’s curve ?

A

This depicts the relationship between the inflation rate and the unemployment rate

20
Q

What did the Phillip’s curve clarify ?

A

there was a stable relationship between unemployment and money wages.
The estimated average relationship indicated that when the level of unemployment was approx. 5.5 %, the rate of change of money wages was 0.
Also, at an unemployment level of approx. 2.5%m the rate of change of money wages was approx. 2% which was roughly = to the then average growth of productivity.
A 2.5 % level of unemployment was compatible with price stability

21
Q

hypothesis of phillip’s curve ?

A
  1. the rate of increase in money wages depends positively on excess demand for labour
  2. excess demand for labour and unemployment are negatively related provided the economic rationale for the phillips curve
22
Q

what is the equation to describe the phillip’s curve

A

W = f(U)

w = rate of change of money wages
U = unemployment
23
Q

What was the Phillip’s curve part of in the 1960s ?

A

The keynesian orthodox

24
Q

A lower rate of unemployment equals …

A

a higher rate of inflation

25
Q

What theory was adhered to by keynesians ?

A

Demand - pull inflation

26
Q

What is demand pull inflation

A

Inflation caused by an excess demand for goods and services when the economy is at or above, full employment

27
Q

When the original Phillip’s curve was broken down, what theory did the Keynesians turn to instead of demand pull theory ?

A

Cost-push inflation

28
Q

What is cost push inflation ?

A

Inflation caused by cost increases even though there are no shortages of goods and services and the economy is below full employment

29
Q

What is real wage?

A

The money wage divided by the price index

30
Q

What is a short run Phillip’s curve ?

A

Depicts the relationship between inflation and unemployment that exists for a given expected rate of inflation

31
Q

What are the assumptions based on the expectations-augmented phillip’s curve ?

A
  1. Productivity growth remains constant at zero with the result that firms will pass on any wage increases in the form of price increases in order to maintain their profit margins
  2. the short run phillip’s curve
32
Q

What is the equation for expectations-augmented Phillip’s curve ?

A

W = f(U) + Pe

W = rate of change of money wages
u = unemployment
pe.= the expected rate of inflation
33
Q

What does disinflation mean ?

A

A decrease in the rate of inflation

34
Q

What does cold turkey mean ?

A

A rapid and permanent reduction in the rate of monetary growth aimed at reducing the rate of inflation

35
Q

What does gradualism mean ?

A

An approach to disinflation that involves a slow and gradual reduction in the rate of monetary growth

36
Q

What is the prices and incomes policy ?

A

Measures that establish guidelines or controls for wage and /or price increases

37
Q

what does credibility mean ?

A

the degree to which people believe the authorities announcements about future policy

38
Q

What does a fixed exchange rate mean ?

A

An exchange rate that is fixed at a predetermined level by intervention by the country’s central bank in the foreign exchange market

39
Q

What is a Bretton Woods system?

A

a fixed exchange rate system established at the end of the Second World War. The system broke down in the early 1970s

40
Q

What is a flexible exchange rate ?

A

An exchange rate that is determined in the foreign exchange market by the forces of demand and supply ; also known as a floating exchange rate

41
Q

What is the non-monetarist view ?

A

It initiates the force of inflation.

42
Q

Examples of non-monetarist view ?

A
1. class conflict is inevitable in a capitalist society, inflation results from the struggle between workers and capitalists as each group strives to achieve a bigger share of national income
The more workers aspirations for real income growth exceed productivity growth, the faster will be the ensuin inflation. 
2. inflation results from the attempts of uniions to improve or maintain their members position in the league table of wages. Trade unions result in an inflationary wage-prive spiral