Inflation deflation and unemployment relationship quiz

Oxford University Press | Online Resource Centre | Multiple choice questions

inflation deflation and unemployment relationship quiz

Currency and Inflation MCQs with Answers or objective questions and answers. These general 5 Increasing unemployment and inflation is a situation of: A hyperinflation B devaluation. C deflation Enter Your Email To Get Daily Quiz. a) An outward shift of aggregate demand and demand-pull inflation. b) An outward According to the Phillips curve, unemployment will return to the natural rate when: The Phillips curve shows the relationship between inflation and what?. of inflation and unemployment. Inflation & Unemployment (1) - Revision Quiz Explaining Price Deflation - Causes, Effects and Policies. Study notes.

We studied in the 5Es lesson that more workers or better workers results in economic growth.

  • Inflation and Unemployment
  • Unemployment and Inflation: Implications for Policymaking
  • Chapter 26: Multiple choice questions

Economic growth is increasing out potential level of output. This is good for society since it also reduces scarcity. Therefore governments have economic growth programs to reduce structural unemployment like financial aid for school and job training programs. Cyclical unemployment is a type of unemployment caused by insufficient total spending or by insufficient aggregate demand.

It is unemployment caused by the recession phase of the business cycle. If there is less aggregate demand firms respond by producing less. Output and employment are reduced. The extreme unemployment during the Great Depression 25 percent in was cyclical unemployment. If there is a recession and therefore an increase in unemployment associated with a decrease in output, this results in more scarcity.

This is not good for society since it will be producing at a point inside its production possibilities curve point D on the graph below or at a level of output short of the full employment level. Therefore, governments have policies to reduce cyclical unemployment.

These are the demand management policies discussed in our lesson on the AS-AD. Expansionary fiscal policies increasing government spending or decreasing taxes and easy money policies increasing the money supply are designed to increase AD, reduce cyclical unemployment, and and move the economy back to the full employment level of output. It is sometimes not clear which type of unemployment describes a person's unemployment circumstances.

This is called the "full employment rate of unemployment", or the "natural rate of unemployment" and it includes: In other words, full employment is zero cyclical unemployment. If there is some frictional and structural unemployment in the economy can the potential level of output still be achieved?

The "full employment rate of unemployment" is the unemployment rate occurring when there is no cyclical unemployment and the economy is achieving its potential output Changes in the Full Employment Natural Rate of Unemployment The natural rate of unemployment is not fixed but depends on the demographic makeup of the labor force and the laws and customs of the nations.

Why did the full employment rate of unemployment increase? Or, another way of saying this is "why did the amount of frictional and structural unemployment increase? After World War II ended in the s the baby boom began. This early research focused on the relationship between the unemployment rate and the rate of wage inflation.

ECON102: Principles of Macroeconomics

Phillips found that between andthere was a negative relationship between the unemployment rate and the rate of change in wages in the United Kingdom, showing wages tended to grow faster when the unemployment rate was lower, and vice versa.

As the unemployment rate decreases, the supply of unemployed workers decreases, thus employers must offer higher wages to attract additional employees from other firms. This body of research was expanded, shifting the focus from wage growth to changes in the price level more generally.

Inflation is a general increase in the price of goods and services across the economy, or a general decrease in the value of money. Conversely, deflation is a general decrease in the price of goods and services across the economy, or a general increase in the value of money.

inflation deflation and unemployment relationship quiz

The inflation rate is determined by observing the price of a consistent set of goods and services over time. In general, the two alternative measures of inflation are headline inflation and core inflation. Headline inflation measures the change in prices across a very broad set of goods and services, and core inflation excludes food and energy from the set of goods and services measured.

Core inflation is often used in place of headline inflation due to the volatile nature of the price of food and energy, which are particularly susceptible to supply shocks.

Many interpreted the early research around the Phillips curve to mean that a stable relationship existed between unemployment and inflation. This suggested that policymakers could choose among a schedule of unemployment and inflation rates; in other words, policymakers could achieve and maintain a lower unemployment rate if they were willing to accept a higher inflation rate and vice versa.

This rationale was prominent in the s, and both the Kennedy and Johnson Administrations considered this framework when designing economic policy. These critics claimed that the static relationship between the unemployment rate and inflation could only persist if individuals never adjusted their expectations around inflation, which would be at odds with the fundamental economic principle that individuals act rationally.

But, if individuals adjusted their expectations around inflation, any effort to maintain an unemployment rate below the natural rate of unemployment would result in continually rising inflation, rather than a one-time increase in the inflation rate.

This rebuttal to the original Phillips curve model is now commonly known as the natural rate model. The natural rate of unemployment is often referred to as the non-accelerating inflation rate of unemployment NAIRU.

When the unemployment rate falls below the natural rate of unemployment, referred to as a negative unemployment gap, the inflation rate is expected to accelerate. When the unemployment rate exceeds the natural rate of unemployment, referred to as a positive unemployment gap, inflation is expected to decelerate. The natural rate model gained support as s' events showed that the stable tradeoff between unemployment and inflation as suggested by the Phillips curve appeared to break down.

Unemploymentby [author name scrubbed]. The CBO estimates the NAIRU based on the characteristics of jobs and workers in the economy, and the efficiency of the labor market's matching process.

The economy is most stable when actual output equals potential output; the economy is said to be in equilibrium because the demand for goods and services is matched by the economy's ability to supply those goods and services.

Unemployment and Inflation

In other words, certain characteristics and features of the economy capital, labor, and technology determine how much the economy can sustainably produce at a given time, but demand for goods and services is what actually determines how much is produced in the economy. As actual output diverges from potential output, inflation will tend to become less stable. All else equal, when actual output exceeds the economy's potential output, a positive output gap is created, and inflation will tend to accelerate.

When actual output is below potential output, a negative output gap is generated, and inflation will tend to decelerate. Within the natural rate model, the natural rate of unemployment is the level of unemployment consistent with actual output equaling potential output, and therefore stable inflation.

How the Output Gap Impacts the Rate of Inflation During an economic expansion, total demand for goods and services within the economy can grow to exceed the economy's potential output, and a positive output gap is created.

As demand grows, firms rush to increase their output to meet this new demand. In the short term though, firms have limited options to increase their output. It often takes too long to build a new factory, or order and install additional machinery, so instead firms hire additional employees.

As the number of available workers decreases, workers can bargain for higher wages, and firms are willing to pay higher wages to capitalize on the increased demand for their goods and services.

However, as wages increase, upward pressure is placed on the price of all goods and services because labor costs make up a large portion of the total cost of goods and services. Over time, the average price of goods and services rises to reflect the increased cost of wages. The opposite tends to occur when actual output within the economy is lower than the economy's potential output, and a negative output gap is created. During an economic downturn, total demand within the economy shrinks. In response to decreased demand, firms reduce hiring, or lay off employees, and the unemployment rate rises.

inflation deflation and unemployment relationship quiz

As the unemployment rate rises, workers have less bargaining power when seeking higher wages because they become easier to replace. Firms can hold off on increasing prices as the cost of one of their major inputs—wages—becomes less expensive. This results in a decrease in the rate of inflation. Model a process for analyzing the impact of employment policies — for example, minimum wage laws or right-to-work laws. Define inflation and differentiate from changes in relative prices. Review the difference between real and nominal values.

Define and distinguish between the consumer price index CPI and the GDP deflator as measures of inflation, and demonstrate how each is calculated. Identify limitations of CPI data and discuss issues related to measurement of inflation. Identify the consequences of inflation and discuss issues related to those consequences, including: Discuss capital markets, interest rates, and inflation.

Discuss the relationship between inflation and unemployment. The employment rate is the percent of the labor force that is employed. The labor force consists of the non-institutionalized civilian population, aged 16 or older, working or looking for work. The unemployment rate is the percent of the labor force that is unemployed, willing to work, and actively looking for employment. Inflation is a sustained rise in the general price level of goods and services.

Inflation reduces the purchasing power of money. Interest rates are the prices necessary to get individuals and households to save, instead of spending money for immediate consumption. Nominal interest rates must exceed real interest rates by the percent of inflation in order to provide effective incentives for saving. If employment is rising, unemployment must be falling. High school and college students are not counted in the labor force.

People who work part time are not counted in government employment statistics.

Relationships: Unemployment, Inflation EMS

The lower the unemployment rate, the better. High prices are synonymous with inflation. The lower the inflation rate, the better.