Economics final

• Inflation


  Rise and fall of the overall price level
• Deflation


  Fall of overall price level
• Disinflation


  Inflation decreases
• Inflation imposes cost on an economy
• Indexing


  Automatically adjusting payments to account for inflation
• COLA


  Cost of living adjustment
• Consumption


  C(PY) = f(income)
• Interest rate


  Controlled by federal reserve
• Interest rate


  Affects loans and savings
• Goals of economy: low unemployment, low inflation, GDP growth
• Weak currency


  Increases exports, decreases imports
• Strong currency


  Decreases exports, increases imports
• Monetary policy


  Manipulation of interest rates by the Federal Reserve
• Liquidity


  Capital that can take any shaped form
• Monetary policy


  1. Open market operations

  2. Reserve requirements

  3. Quantitative easing
• Negative supply shock


  Shifts LRAS left, increases inflation and unemployment
• Increase in inflation


  Shifts Phillips curve up and to the right
• Increase in unemployment


  Shifts Phillips curve down and to the left
• Increase in government spending (G)

  Shifts AD right, can lead to crowding out problem
• Increase in money supply


  Weakens the currency
• Pegging currency


  Can help win a trade war by maintaining a favourable trade balance
• Nominal values


  Do not account for inflation
• Real values


  Account for inflation
• Nominal economic values can mask underlying real changes across time because nominal values don't factor in inflation
• If a country has a 10% GDP growth rate but the country has a 12% inflation rate, Real GDP would have decreased by 2%
• Types of unemployment


  • Demand Unemployment
  • Structural Unemployment
  • Frictional Unemployment
• Demand Unemployment


  Deficient, there are not enough jobs for people who want them
• Structural Unemployment


  Technological advancements taking the place of jobs but there are jobs for people but they have to learn new skills
• Frictional Unemployment


  When someone is looking for a job
• Frictional + structural = natural rate of unemployment (4-6%)
• Long run


  Full employment where there is only structural and frictional unemployment
• It is false that it takes 20 years to reach the long run. A country could reach the long run tomorrow, next year or never, it all depends on the micro adjustments and the nice assumptions
• Components of Aggregate Expenditure


  • Consumption
  • Investment
  • Government spending - taxes
  • Exports - imports
• Currency getting weaker


  It has less buying power
• Example of currency getting weaker


  • Quantitative easing (printing more of it)
• To heat


  We have an inflation problem. A country has less than 4% (low unemployment rate). This makes it hard to find workers. So those firms feel the need to increase wages to attract workers, but in return, it will raise the price of the goods/services
• Consumption = b(PY) + A
• b


  Money earned in the current year that is being spent on the current year's GDP
• P


  Price level
• Y


  Real GDP (factors in inflation)