2.6

• short run Phillips Curve

  an empirical observation noted in 1958 by Bill Phillips

  and increase in aggregate demand increases demand for labour

  shortage of labour increases wages
• short run Phillips Curve - evaluation

  classical view - there is only unemployment if wages are too high, if more people are allowed to become unemployed the pressure on wages falls

  • Keynes disagrees with this assessment
• short run Phillips Curve

  shift from Y to Y1 increases employment so unemployment lowers from 4% to 3.5%, shift from Y to Y1 increases price level from PL to PL1 which increases inflation from 2% to 4%

  trade off between economic growth and inflation with classical SRAS

  
• short run Phillips Curve on Keynesian

  no change in price level on Keynesian on the horizontal bit (generally has high unemployment) - will be a trade off if it's on part of the curve

  
• transmission mechanism

  the process(es) by which changes in monetary policy end uo affecting the real economy
• money

  instrument that helps in the market to regulate the exchange of goods and services and is accepted as the payment as well as incomes
• money supply

  the availability of money within an economy
• asset purchases

  when the Central Bank buys assets (usually debts) to control the price of money
• base rate of interest

  rate of interest the government (Central Bank) controls, as the government should be the least risky group in the economy, it is the lowest rate at the 'base' of the market rates
• bonds

  a type of debt
• gilts

  specific name given to UK government debt
• yields

  name given to market returns from buying bonds, describes a market rate of interest
• there is a supply and demand for money

  demand for money comes from economic agents wanting it in order to buy things, money is anything that is acceptable in exchange for goods or services, the more we want to buy things the more we demand money

  supply of money comes from the monetary base - how many notes and coins the government will print and the ability of the banking sector to create new money through its lending
• supply of money

  decrease in the supply of money will shift Sm to Sm1 - increases interest rates from R to R1

  
• quantitative easing

  the Central Bank can create new money and then "swap it" or ("asset purchase") bonds held by banks

  these banks now have more money

  they then want to led it out and hence increase supply of money - lowers market rate of interest rate

  it is reversible - hyperinflation doesn't occur
• quantitative easing (simplified)

  Central Bank creates (prints) new money

  it swaps this money (asset swap) with Banks for Bonds (usually government bonds but could be corporate bonds); increases money supply and lowers market rates of interest
• why would the Central Bank do quantitative easing

  when the base rate of interest is near to zero (in real terms) then cutting the base rate further can have little impact - called the zero lower bound

  if market rates of interest are going in a different direction to the base rate then QE can correct this and bring monetary policy 'back under control'

  e.g. - March 2020 Covid caused market concerns, September 2023 UK 'Fiscal event' caused market concerns
• how expanding the money supply can lead to inflation

  increase in money supply without an increase in investment, jobs, productivity, number of goods and services etc means that the value of money falls, more money is needed to buy the same amount of goods, increasing prices causing a rise in inflation
• why is QE different from printing more notes

  the process is reversable: Central Banks now holds bonds, which it can sell if it needs to raise interest rates

  the Central Bank will hopefully have 'credibility' in its ability to manage the money supply and hence inflation, if financial markets believe that the Central Banks has things under control they will continue to act normally