inflation BW

Bell work 10/09/2012

1.       Explain the reasons gov. aim to maintain a low and stab rate of inflation.

There are many costs to inflation and deflation and this is why gov. aim to mainatain a low and stable rate of inflation

Loss of purchasing power- when inflation rises faster than wages, people lose purchasing power.

Effects on savings- when inflation ries faster than the interest rate, negative savings can occur.

Effects on interest rates- when inflation occurs, banks mist raise interest rates in order to maintain profits from lending money

Effects on international comp.- when inflation occurs, goods produced domestically become less appealing to foreigners.

Uncertainty- when inflation occurs and banks raise interest rates, business confidence drops, uncertainty occurs and firms spend less on investment.

Labor unrest- if labor feels wages are not kept up with inflation- disuputes and riots occur

Costs of deflations

Unemployment- when AD is low, businesses tend to lay of workers

Effects on investment- during deflation firms make less, they then lay of workers

Costs to debtors- value of loans decrease

2.       What is the difference between deflation and disinflation?

Disinflation is a slower rate of inflation, inflation is still going up, just at a slower pace

Deflation is a negative inflatin rate

3.       Which is worse inflation or deflation? Why?

Argued that deflation is worse since the country will experience less output, experience unemployment and possible fall into a deflationary spiral

work sheet on

Low Unemployment Worksheet

Objective 1: Explain what is meant by unemployment.

Define the following:

Unemployment	People of working age who are without work but are available for work and  are actively seeking work.
Unemployment Rate	Number of people unemployed expressed as a percent of the labor force
Labor Force	Definition varies from country to country but includes people willing, able and wishing to work between the legal work age and retirement.

Objective 2: Explain the difficulties involved in measuring unemployment.

Limitations of unemployment data:

Unemployment definition inconsistencies	Depends from country to country so we can not compare
Data collection inconsistencies	Different countries collect their data is in different ways
Masks Distribution Disparities	Ethnicities Age Gender
Hidden Unemployment	Discouraged workers- someone who has given up on looking for a job Part-time workers- half time work, not enough Underemployed workers- over qualified for the job they are doing

 Objective 3: Discuss the costs of unemployment.

Costs to unemployed themselves	No income, low standards of living, possible suicides
Costs to society	Opp. Cost, Poverty, higher rates of crime, vandalism, increased gang activiety
Costs to               whole economy	Producing within the ppc curve Opp cost to the government

Objective 4: Distinguish between the different causes of unemployment.

Inflows- cause unemployment rate to rise

Lost jobs

Resignment

People who have left school

People trying to return to work after having left it

People who have imigrated

‘Pool of Unemployed’

Outflows- cause unemployment rate to drop

People who have found jobs

People who retire

People who go back to education

People who choos to stay at home

People who emigrate

People who give up the search for work

People who passed away

The labor market in equilibrium

 

Types and causes of unemployment.

a)      Disequilibrium unemployment-occurs when there are any conditions that prevent the labor market from clearing

b)      Real wage-unemployment

Argues that unemployment is caused by trade unions and government minimum wages altering with labor market

 

Solutions for real wage unemployment.                                                  Consequences of the solutions.

Reduce trade unions to unfluence wages	Politcaly un popular Harms poor the most Causes greater income inequality
Reduce minimum wage

a)      Demand-deficient (cyclical ) unemployment- as countries enter a period of slow growth c and I go down which leads to a decrease in aggreagate demand but because wages are sticky downward so unemployment results

 

Solution for demand-deficient unemployment.

Expansionaray policicits fiscal monetary	Lower taxes increase gov spending
	Lower interes rates increase money supply

c)       Equilibrium Unemployment- (equal to the natural rate of unemployment or full emplyent elevel output) occurs when there is no real wage or demand defiant unemployment; still some natural unemployment excists (frictional season structure)

 

a)      Frictional Unemployment- short term unemployment when people are between jobs or have left education and are waiting for a job. *people usually move up though.

Solutions for Frictional Unemployment

Market based : ensure unemployment benefits are not too generous

Interventionis: ensure flow of information about existing jobs is good

b)      Seasonal Unemployment- when employment occurs on a seasonal babsis again- intuitively natural; ie construction workers in cold climate.

Solutions for Seasonal Unemployment

Improve the flow of imformation Encourage seasonal workers to ake new jobs

c)       Structural Unemployment- results when a particular type of labour is no longer needed, due to a number in structure within the economy likely to result in long term unemployment

Causes of Structural Unemployment

Wworkers lack skills to take new jobs

Lack occupational mobility

Lack geographic mobility

New technologies (atm)

Outsourcing call centers

Consumer taste

Interventionist solutions to structural unemployment                                                      Evaluation of solution

Use an edu system that trains people to be occuplationally flexible	Only effective long term
Increase gov on adult retraining programs
Subsidizes to firms that provide worker training	Opp costs
Subsidies – tax breaks to encourage geographic mobility	Expensive
Gov support of apprentice programs

Market-based Solutions for Structural Unemployment

Lower unemployment benefits to increase incentive for people to take existing jobs	Increase income inequality
Lowe labor market regulations to make it easier for firms to hire/fire	Working conditions+ hugh costs to workers themselves

Analysis of unemployment reducing policies

Solution to unemployment- dependent on type- hard to determine

Demand deficient Expansionary fiscal policy ofton requires budget deficients

Lower taxes does not always mean. People may choose to save and not spend

Lowering interest rates does not mean and increase in investman, depends on business confidence

If AD policies successful- there will be likely be a time lag

Even at yf there will be some unemployment Have to be careful to avoid ad policies at yf due to inflation

Most common/ acceptable to use mix of demand and supply side politics

Crowding out-

The concept that when govs run budget deficits to increase AD and reduce unemployment they ‘crowd out’ busineses and private individuals from loanble funds market causing interst rates to increase and I to decrease.

Keynesian viewpoint on Crowding-out:

  Classic viewpoint on crowding out:

bell work for equilibrium and disequilibrium

http://imgur.com/93xqu

bell work, unemployment

Kristian Villadsen

Bell work

1.      Chart/list some of the difficulties in masuring unemployment

Definition of unemployment varies from country to country, data inconsistency, difference in disparities (age and gender), hidden unemployment.

2.      35.5 million people of whom 17.3 million are in the labour force. 1.5 illion work part tme thogh would work full time, 0.5 are discouraged and 1.4 are looking but cant find any. What is the unemployment rate

1.4/17.3*100=8.1 %

3. Create a graphic organizer showing some of the costs of unemployment

Important because of the high costs

- costs to the unemployed: receive less income, lower standard of living, dejected, stress and erosion of mental health.

- cost to society- areas of unemployment there is poverty, homelessness, higher rates of crime and gang activity

Connected not solely to unemployment

-Costs of unemployment to the economy as a whole: less output, higher government spending

Inflation

Cost of inflation	Negative consequences in high levels of inflation -          Loss of purchasing power An increase or decrease in how much consumers can buy with a given amount of money. Consumers lose purchasing power when prices increase, and gain purchasing power when prices decrease. Causes of purchasing power loss include government regulations, inflation and natural and man-made disasters. Causes of purchasing power gain include deflation and technological innovation. -          Effects on saving Inflation discourages saving because money loses its purchasing power -          Effects on interest rates Increase their interest rates in order to keep their real rate they earn positive -          Effects on international competitiveness Their exports will be  less competitive -          Uncertainty Firms are discouraged to invest -          Labour unrest Wages arnt kept up with inflation
Deflation	Persistent fall of average prices in the economy Good and bad Good- improvements in supply side of the economy/ productivety Bad- demand side
Costs of deflation	-          Unemployment Demand is low so they lay of workers -          Effects on investment Firms make less profit or losses so they stop investment and lower confidence -          Cost to debitors Bankruptcies beause they cant pay back their banks
How is inflation measured	Cpi- consumer price index Rpi- retail price index Measure in a group of items Each thing has a weighting http://www.qatarisbooming.com/2012/08/14/consumer-price-index-cpi-july-2012/
Issues involved in the measure of inflation	1.       Not applicable to all people as different families spend differently 2.       Errors in the collection of data 3.       Takes time to add or remove items 4.       Different countries have different ways of measuring inflation 5.       Prices may change in such reasons as season 6.       Another system measures price of raw materials
Causes of inflation	Demand pull Cost push Excess monetary growth "There are different kinds of inflation in the world today. Basically, there are four main types which include wage inflation, cost-push inflation, pricing power inflation and secortoral inflation.Wage inflation is also known as demand-pull inflation. Demand-pull inflation is dependent on the demand of goods which changes the price of the product. During war time, this type of inflation may  change dramatically.Cost-push inflation changes when the cost of goods needed for production changes. This in turn drives the cost of goods up. This type of inflation is also affected by increasing costs in labor.Pricing power inflation is also known as administered price inflation. When companies decide to raise the cost of their prices to increase their profits this type of inflation is in play.Sectoral inflation is a more specified inflation that takes place when a certain sector increases prices across the board. One great example of this type of inflation is the oil industry.
Reducing inflation
Calculating inflation
The inglation unemployment trade off debate

A low and stable rate of inflation

Bellwork 27/08/12

Bell work entry 1

1.       Chart macro economic objectives

Economic growth	1. a steady rate of increase of national output
Employment	a low level of unemployment
Price stability	a low and stable rate of inflation
External stability	a favorable balance of payments position.
Income distribution	an equitable distribution of income

2.       Diagram, illustrate the classic and Keynesian viewpoint

Look at paper

3.       Create a chart that demonstrates expansionary demand side policies (divided into interventionist and market based)

Demand-

Decrease tax

Increase government spending

Decrease in interest rates

increase in money supply

Interventionist supply side policies (keynsisian)	Market based supply side policies (classic)
Investment in human capital (education) (training)	Reduction in household income taxes
Research and development Tax incentives, enforcing intellectual. Property rights or research and development in universities	Reduction in corporate taxes
Provision and maintenance of infrastructure	Labor market reform 1)reduce trade union power 2) reduce or eliminate minimum wage 3) reduce unemployment benefits
Direct support for businesses/industrial policies Anti trust laws, helping small/medium sized firms become established and grow	Deregulation
	Privatizing
	Policies to increase competition