unit 7

refers to the no. of people in the working age population who are available for work at current wage rates but are without a job

indicates non-zero, low unemployment rate that is compatible with price stability, when all those who are willing and available to work are employed

a period of sustained increase in GPL

situation where prices in economy rise slowly and predictably over time. Govt defines it as low and stable inflation rate of 2%

situation where AD is persistently greater than AS, close or at full employment of resources, generating a sustained increase in GPL

1. AD rise too quickly

2. lack of investment in previous time period which results in capacity constraint

3. tightening of labour market as UN falls ( AD operating near to full employment of output)

arises from sudden and significant increases in economy-wide production costs

1. rise in px of imported raw materials ( disruption in SS, rise in px of imported raw materials in foreign country, depreciation of domestic currency)

2. rise in wages (not due to rising AD)

1. It is due rise in px of imported raw materials in foreign country, depreciation of domestic currency and disruption in SS

2. With rise in cost of imported raw materials, unit COP rises. This causes profit-maximising producers to cut back on production as it becomes more expensive for producers to produce and quantity supplied is smaller. This shifts individual mkt SS curves left. If enough individual mkt SS curves are affected, the total output the economy produced decreases, shifting AS leftwards.

3. One important condition of cost-push inflation is that unit COP must persistently rise. As cost of imported raw materials increases, unit COP rises again. The increases AS further from AS2 to AS3. Higher costs is passed onto consumers, raising GPL from P2 to P3

this occurs when very strong trade unions presses for higher wages that exceeds increase in productivity. This raises unit COP. Ceteris paribus, at every price, profit-maximising firms will cut back on production as it becomes more expensive for producers to produce and a smaller quantity is supplied. This shifts individual mkt SS curves left. If enough individual mkt SS curves are impacted, total output the economy can produce decreases, causing AS to shift left.

1. one important condition for cost-push inflation is persistently rise in unit COP. This can occur when trade unions press for higher wages in order to maintain the real income of workers against rising product prices. If rise in wages exceed increases in productivity, unit COP will increase again. This leads to further shift in AS, higher costs are passed onto consumers, raising GPL

decrease in real income and purchasing power.

Real income refers to nominal income adjusted for inflation. It indicates the volume of G&S consumers can buy for a given amount of money.

Inflation reduces the internal value of a currency. Hence this reduces MWB as consumer are less able to purchase G&S, decreasing mSoL.

1. For fixed nominal income receivers such landlords and public sector employees, will suffer most during inflation. Given a constant money income, increase in GPL leads to decrease in real income

2. For variable income earners, whose incomes are represented as a percentage of the value of the work undertaken, may not suffer from inflation. For example, insurance agents will earn higher commissions due to higher insurance prices. Assuming nominal income increases more than inflation rate, real income increases, mSoL increases

1. reduced profits

   increase is shoe-leather costs which the cost incurrred by firms when moving money in and out of financial institutions in search of higher rates of return. and also increase in menu cost of inflation which is the cost of constantly revising price lists, labels and catalogues.

2. decrease I due to uncertainty

taxpayers move into higher tax bracket due to nominal income increases, pay greater proportion of their income as taxes, govt get more tax revenue

1. prevent erosion purchasing power and ensure high SoL.

   ensures that workers, especially those with weak or without trade unions, are not able to press higher wages to compensate for rising prices as compared to workers in trade unions with high bargaining power.

2. increased I due to increase in dad for g &s, business confidence