Topic 8 - Supply-side Policies Flashcards
(36 cards)
8.01 - What is the phillips curve?
It is an inverse relationship suggestive of a trade-off between inflation and the unemployment rate, which suggests higher AD equals inflation and low unemployment and lower AD equals slow growth and high unemployment
8.02 - How is the Phillips curve relationship complicated?
By
- the ratchet effect - downward price/wage inflexibility when AD declines
- shifts in short run aggregate supply which affect the rate of inflation at which the apparent trade off between inflation and unemployment occurs.
8.03 - What is stagflation?
It represents the simultaneous experience of both high and increasing unemployment and inflation.
8.04 - what does the presence of stagflation suggest?
That the apparent trade-off between inflation and employment posited by the original Phillips curve has broken down.
8.05 - What is the natural rate hypothesis?
It is a hypothesis that suggest that there is a unique level of unemployment around which observed unemployment will fluctuate, but the economy will tend towards at any point in time.
8.06 - What is a variant of the natural rate hypothesis?
The adaptive expectations theory which assumes that people form their expectations of future inflation on the basis of previous and present rates of inflation and only gradually change their expectations as experience unfolds, thus that expectations are backwards looking, suggesting that continuous forecasting errors will be made.
8.07 - An acceptance of the natural rate of employment hypothesis suggests that we face two Phillips curve? what are they?
- An unstable short-run Phillips curve; and
* a stable long-run Phillips curve at the natural rate of unemployment
8.08 - What are two explanations of the natural rate hypothesis?
- the adaptive expectations approach, and
* the rational expectations approach
8.09 - What is the adaptive expectations approach?
This approach argues that in the long run the traditional Phillips curve trade off does not exist. Expansionary demand management policies will shift the short-run Phillips curve upward, resulting in increasing inflation with no permanent decline in the unemployment rate.
8.10 - What is the rational expectations theory (RET) approach?
This contends that the inflationary effects of expansionary policy will be anticipated and reflected in nominal wage demands. As a result, there will be no short-run increase in employment, and thus, no short-run Phillips curve.
8.14 - What is demand-pull inflation?
Demand-pull inflation occurs when an increase in AD pulls up the price level.
8.15 - Graphically how is demand-pull inflation drawn?
Aggregate demand shifts rightward along a stable AS curve. In the short run this then increases prices and real output. Because supply has increased as a result, prices will increase, decreasing output and as such in the long run the increase in aggregate demand has only moved the economy up the vertical aggregate supply curve.
8.16 - What is cost-push inflation?
Cost-push inflation occurs when an increase in the cost of production at each price level shifts the aS curve leftward resulting in increased pries.
8.17 - Graphically how is cost-push inflation drawn?
In the short run the AS curve moves leftward resulting in less output and higher prices. This in turn may increase demand pushing prices higher. As such in the long run the increase in aggregate supply has only moved the economy up the vertical aggregate supply curve.
8.18 - What is the policy dilemma when faced with cost-push inflation?
That
- If government intervenes to increase AD an inflationary spiral will result
- If government does not intervene to increase AD a severe recession will result.
8.19 - Given the high unemployment and high inflation of the 70’s & 80’s it is unsurprising that the market economies have looked beyond demand market policies to attempt to deal with stagflation. What are two categories of non-demand management policies that have been proposed?
- Market policies
* Wage-price (or incomes) policies
8.20 - What are the two kinds of market policy?
- Employment and training policy; and
* Pro-competition policy
8.21 - What is the aim of employment and training policy?
To better match workers to jobs, thus reducing labour-market imbalances or bottlenecks.
8.22 - What are the three types of employment and training policy programs?
1) Vocational training - on the job
2) Job information - between the unemployed and potential employers
3) Anti-discrimination programs - removing non-economic obstacles to employment.
8.23 - What is pro-competition policy?
It is policy that helps reduce the monopoly or market power of
- unions (affecting wages) and/or
- large companies (affecting prices)
8.24 - How is pro-competion policy enacted by the government?
Through the Trade Practices Act.
8.25 - What is the area of growth economics concerned with?
Concerned with analysing the patterns of long-term trends in an economy’s productive capacity and the factors that influence these trends
8.26 - In what two related ways is Economic Growth defined and measured?
- the increase in real GDP that occurs over a period of time
* the increase in real GDP per capita that occurs over time.
8.27 - How are the two definitions and measures of Economic Growth used?
- GDP over a period is relevant to questions of military potential, whereas per capita output is more useful for comparing the economic standard of living between nations.
