RWE 2 Flashcards
(23 cards)
Monetarist Model - Automatic Stabiliser
Who: Technology Industry, US
When: 2022-23
What: Mass firing of employees after C-P inflation
Why: Costs of employment increased too much = made employees redundant
How: Companies made employees redundant, reducing income and AD = auto-correction mechanism by profit maximising companies
So?: Due to little govt. influence, economy self correct without govt. intervention
AD increases are always inflationary
When: 2021-22, US
What: Post covid = demand pull inflation
Why: During covid = lots of savings + stimulus by govt to increase economic activity → inflation
How: relaxation after covid and govt stimulus = consumption increase → AD increase → inflation
So?: AD increase → inflation (despite being in deflationary gap (-2% growth rate))
Monetarist Model - SRAS exists - Cost push inflation
When: 2022, US
What: Cost push inflation
Why: Costs of FOP increase, especially labor and oil and gas from Ukraine vs Russia
Consequences of economic growth on living standards, income distribution and environment
Where: China
When: 1990s - 2010s
What: Rapid GDP growth, 9.5% per year
Why: China’s export-led strategy with cheap labor and large manufacturing hub → rapid economic growth.
How: Exports + Govt. Spending consistenly grow → greater GDP
So?:
- Environmental damage → 2 CO2 metric tons/capita → 8 CO2 mectric tons
- Income distribution gets worse = moderately unequal → one of the most unequal
- Living standards improve overall, better development and urbanisation
High inflation, low unemployment (short run philips curve)
Where: Australia, 2023
What: Inflation 7.8%, unemployment rate 3.5% (very low)
How:
AD increase = employment increases + inflation. Labor market is extremely tight so low amount of unemployment
So?:
Pros:
- Better living standards → can bargain for higher wages due to low unemployment.
- Able to afford any inflationary increases
Cons:
- Businesses keep raising prices of goods up → wage-price inflationary spiral
- Negative effects on fixed income and lower income people
Low inflation and high unemployment (short run philips curve)
Where: Eurozone countries, Greece and Span
When: early 2010s, after financial crisis
How: Countries faced with prolonged period of low inflation/deflation + high unemployment
So?: Incerased in poverty rates, strained social safety nets
Conflict between inflation and unemployment (long run philips curve)
Where: Australia, 1970s
What: Inflation - 14.4% ; UE - 5.3%
How: OPEC increase price → costs of capital increase (SRAS shifts left, SRPC shifts right)
- Extreme increase in costs + insufficient AD = workers laid off → high unemployment + C-P inflation
So?:
Proves LR Phillips Curve → during stagflation, output fell while prices rose → unemployment + inflation = lower living standards for low/fixed income earners in Australia.
High economic growth, low inflation
Challenging the notion of trade off between inflation and unemployment
Where: US
When: Mid to late 1990s
What: dot com boom in the US
How:
- Tech advances → higher productivity & efficiency → LRAS shifts right
- Inflation stays low due to efficiency & productivity gains
So?: Positive effects on employment, incomes, overall living standards
Monetary policy achieve low inflation (unsuccessful) (Arg - 2018)
- 2018 - 34% inflation
- CMP → increase interest rates and reduce money supply for commercial banks
- 2020 → inflation reached 42%
Monetary policy achieve low inflation (success) (NZ - 1990)
- 1990 - 6% inflation
- Reserve Bank establish inflation target between 1-3%
- Official Cash Rate manipulated to make borrowing more expensive
- 1992 - 1% inflation
Monetary policy to achieve low unemployment (Successful - US)
Where: US
When: After 2008 financial crisis
What: EMP
How: Lower interest rates + QE → purchasing financial assets to boosts economic activity
So?: Lower interest rates = encourage borriwng and investment → incerased spending → unemployment gradually decline
Monetary policy to achieve low unemployment (unsuccessful)
Where: Eurozone, 2010
How: ECB use monetary policy to address fiscal concerns → did not target unemployment
So?: High unemployment rates
Fiscal policy to achieve low inflation (success - turkey)
- 2003 - 21% inflation
- Reduced budget deficit and rationalised public spending + reform tax system to increase tax revenue
- 2005 - 8% inflation
Fiscal policy to achieve low inflation (unsuccess - thailand)
When: Thailand 1997
How: fiscal policy to curb current deficit → raising VAT to increase tax revenue and cutting expenditures
Impact: Inflation 5% → 8%
Fiscal policy to achieve low unemployment (successful - germany)
- Germany = 8% unemployment rate
- Govt spendig on infrastucture, education + tax cuts and incentives to firms for hiring workers
- EFP → unemployment rate = 5% in 2012
Effectiveness of SSP (Sucessful - US)
UE rate = 10% in 2009
- FED lowered interest rates and applied QE → purchasing bonds and injecting liquidity into finanical system
- 2015 = 5% UE rate
Monetary policy to reduce deflationary gap (success - UK)
Who: Bank of England
When: post-Brexit vote in 2016
What: Announce low rates to boost confidence.
Mechanism: Central bank signals future policy direction → shapes expectations → encourages spending
Result: Prevented a deeper contraction in UK GDP.
Limitations of Monetary Policy (Japan)
Liquidity Trap / Low Interest Rates
Who: Japan
When: 1990s
What: Despite ultra-loose policy, weak growth and deflation persisted due to structural issues and ageing population.
Why: When interest rates are already near zero, further cuts have little effect (e.g., Japan & Eurozone).
Supply-Side Policies Improving growth and employment (SK)
Who: South Korea
When: 1960s-Present
What:
- Prioritize education –> highly skilled workforce
- Agrarian society –> technological powerhouse
- Investments in education facilitated rapid industrialization and economic growth.
Effects of Privatization on Economic Efficiency (UK)
Who: United Kingdom (1980s-1990s)
What: Privatization of British Telecom and British Airways –> increase efficiency through market competition
Results: Improved services and profitability
Demand-Pull Inflation due to Overheated Economies (VN)
Who: Vietnam (2007-2008)
What: Strong export growth and FDI –> economic growth
Domestic consumption increase while supply lagged –> inflation
Deflation and Its Economic Impacts (JP)
Japan (1990s–2010s)
What:
- Consumer and business confidence plummeted
- Prices fell persistently, which discouraged spending and investment.
- Despite ultra-loose monetary policy, inflation expectations remained negative, reinforcing the deflationary trap.
Cyclical Unemployment from Recession (US)
United States (2020 – COVID-19)
What:
- Sharp decline in demand across hospitality, travel, and retail.
- Cyclical unemployment = businesses were forced to shut or operate below capacity.
