Topic 10: 10.1 & 10.2 | Low unemployment and Costs of Unemployments

What are the four macroeconomic objectives?

Low and stable inflation, Low unemployment, Sustainable economic growth, Equitable distribution of income.

What is inflation?

A persistent increase in the average/general price level in an economy.

What is deflation?

A sustained decrease in the average/general price level.

What is disinflation?

A slower rate of inflation where prices still rise, but more slowly than before.

What is a consequence of high inflation on workers?

Workers experience falling real wages, feeling poorer even if their nominal wage increases.

How does high inflation affect consumer confidence?

Reduced purchasing power leads to less demand, lower revenue for businesses, and ultimately economic slowdown.

What is stagflation?

A situation where inflation occurs alongside stagnant economic growth and high unemployment.

Define nominal income.

The amount of money you earn, without adjusting for inflation.

Define real income.

What you can actually buy with your nominal income after accounting for inflation.

How does inflation impact savers?

If inflation exceeds interest rates, real savings decline, causing loss of value.

What triggers demand-pull inflation?

A rise in aggregate demand, often linked to increased government spending or investment.

What triggers cost-push inflation?

A fall in aggregate supply due to factors like natural disasters or global supply issues.

What is the Consumer Price Index (CPI)?

A measure used to track the cost of a fixed “basket” of goods and services over time.

How is the inflation rate calculated?

Using the formula for CPI, where a positive percentage indicates inflation and a negative percentage indicates deflation.

What is the impact of inflation on export competitiveness?

Domestic products become more expensive abroad, leading to decreased exports.

What social inequality effect does inflation have?

It tends to widen income inequality, disproportionately affecting low- and middle-income households.