Unemployment, Inflation And Output Flashcards

1
Q

Define menu costs

A

Inflation forces firms to change prices more frequently

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2
Q

What are shoe leather costs?

A

The time and effort devoted to beating inflation

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3
Q

What are some costs of inflation?

A
Less liquid assets
Shoe leather costs
Menu costs
Inefficient allocation of resources
Difficult investment/saving decisions 
Hyperinflation can wipe out generation of savings
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4
Q

Describe the wage-price spiral:

A

Low unemployment leads to higher nominal wage, so firms increase prices, so workers ask for higher wage, so firms increase prices

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5
Q

The race between prices and wages results in steady wage and price ______

A

Inflation

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6
Q

The natural rate of unemployment is….

A

The unemployment rate such that the actual inflation rate is equal to the expected inflation rate

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7
Q

What does NAIRU stand for?

A

The non-accelerating-inflation-rate of unemployment

The rate of unemployment required to keep the inflation rate constant

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8
Q

Why has the natural unemployment rate increased in Europe?

A
Labour market rigidities:
Unemployment insurance
Employment protection
Minimum wages
Bargaining rules
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9
Q

What is wage indexation?

A

Automatically increases wages in line with inflation - has great effects when inflation is high or more variable

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10
Q

What is inflation?

A

The rate at which the price level increases

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11
Q

What is disinflation?

A

Decrease in inflation

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12
Q

How can disinflation be obtained?

A

Only at the cost of higher unemployment

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13
Q

What is the sacrifice ratio?

A

The number of point-years of excess unemployment needed to achieve disinflation of 1%

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14
Q

What is the Lucas critique?

A

It states that it is unrealistic to assume that wage setters would not consider changes in policy when forming their expectations

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15
Q

What are emphasised nominal to digitise?

A

Many prices and wages are not readjusted when there is a change in policy

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16
Q

What rigidities can make disinflation policy change challenging?

A

Fixed nominal contracts and staggering of wage decisions

17
Q

What 3 conclusions did Laurence Ball reach when estimating sacrifice ratios for 65 disinflation episodes across 19 countries?

A

1) disinflations lead to a period of higher unemployment
2) faster disinflations are associated with smaller sacrifice ratios
3) sacrifice ratios are smaller in countries that have shorter wage contracts

18
Q

Can the nominal interest rate ever be negative?

A

No because no one would hold bonds since money would be more appealing: it pays at least a zero nominal interest rate and can be used for transactions

19
Q

Can the real interest rate be negative?

A

Yes if expected inflation exceeds the nominal interest rate. The value of money is decreasing because of inflation. You would still want bonds over cash because the real interest rates (which pay nominal interest) will exceed the real interest rate on money (which does not pay nominal interest) by the nominal interest rate.

20
Q

What are the effects of a negative real interest rate on borrowing and lending?

A

Borrowing becomes very attractive and leads to a large demand for investment