Unit 15- Macroeconomics

Inflation

Inflation

An increase in the general price level

zero inflation

a constant price level from year to year

disinflation

a decrease in the rate of inflation

deflation

a decrease in the general price level

Fisher equation

Real interest rate= nominal interest rate-inflation rate

Wage-price spiral

rising wages increase disposable income raising the demand for goods and causing prices to rise

Unemployment below eqm

• workers’ claim to real wages+ firms’ claims to real profit> total productivity

• Upwards pressure on wages and prices

• a +ve bargaining gap & inflation

Unemployment above eqm

• workers’ claim to real wages+ firms’ claims to real profit< total productivity

• Downward pressure on wages and prices

• -ve bargaining gap & deflation

Bargaining gap

Difference between the real wage required to incentivise effort; and the real wage that gives firms enough profits to stay in business

Phillips Curve

Determines the feasible trade-offs between inflation & unemployment (MRT)

Indifference curves

shows policymakers’ preformed trade-offs between inflation & unemployment(MRS)

Supply shocks

Unexpected change on the supply side of the economy

Market Interest rates

1. Choose desired level of AD to stabilise the economy

2. Estimate the real interest rate which matches the level of AD

3. Calculate the nominal policy rate that’ll produce the appropriate market interest rate

Exchange rate

Number of units of home currency that can be exchanged for one unit of foeigin currency

Quantitative easing

central bank purchases of financial assets aimed at increasing investment by reducing yields

Inflation targeting

Monetary policy regime where the central bank uses policy instruments to keep the economy close to an inflation target

Monetary policy

decreasing the nominal interest rate to stablise the impacting AD

Fiscal policy

Tax cuts and increased gov spending(government intervention)

Asset Price channel

This focuses on financial assets, such as gov bonds. As the interest rate changes(decreases), this will impact asset prices

Exchange rate channel

An increase in the REPO rate causes other short term interest rates to rise, and thus if international interest rates remain the same, this will lead to the demand for South African bonds increasing→ increasing demand for rands

difference between Keynesian and AD?AS model

In AD/AS model, prices and wages are variable which allows us to study inflation

Why does inflation benefit borrowers over lenders

By the time that the bank is paid back, they have lost purchasing power due to inflation

Crowding out

Where government increasing spending to discourage private spending