macroeconomics 1/3

What is the Phillips curve?

Illustrates the inverse relationship between inflation and unemployment

Is unemployment and inflation inverses of each other?

Yes when unemployment is low inflation is high and when unemployment is high inflation is low

What happens when there is low unemployment and high inflation

When more poeple are employed, consumer demand rises, pushing prices upward

What happens when unemployment is high and inflation is low?

With fewer people employed, demand decreases, reducing upward pressure on prices.

What is stagflation?

a combination of Stagnant economic growth, high unemployment, and high inflation.

What causes stagflation?

Supply shocks and poor economic policies

What is a supply shock

sudden increase in oil prices can raise production costs, reducing economic output while driving up prices.

What is poor economic policies

excessive regulation, restrictive supply chains, or monetary policy missteps can contribute to stagnation alongside rising prices

Why is stagflation hard to fix?

Banks Typically interest rates which can further slow growth and lower interest rates or increase spending from unemployment which can worsen inflation.

What is the Natural Rate Hypothesis

Theory that suggests there is a specific level of unemployment called the natural rate of unemployment that the economy tends to return to in the long run

Acoording to the natural rate hypothesis what could happen in attempts to reduce unemployment below the natural rate?

Leads to rising infaltion without improving employment levels in the long term

What will happen in the short run according to the natural unemployment rate if attempts to reduce unemployment below the natural rate?

often lead to a trade-off with inflation, as policies aimed at boosting demand and employment can also drive up prices

What will happen in the long run is according to the natural rate hypothesis unemployment is attempted to be brought down under the natural rate?

Wages will adjust, inflation will increase and unemployment will eventually return to its natural rate

What is the natural rate of interest?

Theoretical interest rate at which an economy is in equilibrium — meaning it is growing at its potential rate without generating excessive inflation or causing unemployment to rise.

What rate balances savings and investment in the economy?

Natural rate of inflation

is the natrual rate of inflation expansionary or contractionary?

no

How is the Natraul rate of Interest estimated?

It is not directly observed; economists estimate it based on factors like economic growth trends, productivity, and demographic shifts.

Why is teh Natural rate of interest improtant?

Central banks like the federal reserve use estimates of the natural rate to guide monetary policy.

What does it mean if the natural rate of infaliton is expansionary?

If it is below the natural rate, the policy is considered expansionary, which can stimulate economic growth but may risk inflation

What does it mean if the natural rate of interest contractionary?

It the actual interest is above the natural rate the policy is considered contractionary, which can help slow growth but may increase unemployment

What are the factors that influence natural rate of inflation?

Productivity growth, demographics, and global savings and investment trends.

What is productivity growth a factor influencing the natural rate of interest?

Higher productivity tends to raisew the natural rate

What is demographics a factor in infleuncing the natural rate of interest?

Aging population or slower labor growth can lower it

Why is gloabal savings and investment trends a factor in the natural rate of interest?

Increased global savings can push the natural rate downward

What is rational expectations?

Theory that suggests that people use all available information, including economic theory data, and policy changes, to make infromed forecasts about the future, it assumes that individuals and businesses make unbiased predictions, even if they’re not always correct

What are key features of rational expectations?

Forward looking, efficient use of info, and central to modern macroeconomics

Why is foward looking a key feature in rational expectations

People anticipate future changes rather than relying only on past trends

Why is efficient use of info a key factor in rational expectations?

expectations are formed based on current data, trends, and anticipated policy changes,

What is teh adaptive expectation?

This theory suggests thatpeople form their expectations about the future based on past experiences and observed trends. Essentially, individuals adjust their expectations gradually as new information becomes available.

What are key features in adaptive expectations?

Backward looking, slow to adpat and common in older economic models

Why is backward looking a key factor in adaptive expectations

people assume that future outcomes will resemble past trends

Why is slow to adapt a key factor in adaptive expectations?

If inflation has been rising steadily, individuals may continue to expect higher infaltion, even if economic conditions change.

What key differences between rational and adaptive expectations?

Adaptive: based on trends, gradual and slower, may result is systematic errors, may be short term effects as people adjust slowly

Rational: uses all infor available, faster and more responsive, assumes unbiased forecasts, may lose effectiveess if people anticipate their impact.

Which theory dominates? Adaptive or Rational?

Adaptive expectations are useful in explaining situations where people react sluggishly to economic changes

rational expectation better explain environemnts where individuals have acces to information and quickly adjust their behavior accordingly.

What are adaptive policy expectations?

People form expectations based on past policy trends.

What are rational policy trends

People use all available info including policymaker’s stated goals, economic data, and current conditions, to predict future policy actions.

What are histrical cycles?

Recurring patterns or trends in history, particularly in politics, economics, and social change

What are different type of historical changes?

Economic cycles, polictical cycles, generational cycles

What is the economic cycle in historic cycles?

These cycles decribe the fluctuations in economic activity over time, characterized by 4 phases.

What are teh 4 phases economic cycles are characterised by?

Expansions, peak, contraction/recession, and trough

What is expansion in the economic cycle

grwoth and rising prosperity

What is peak in the economic cycle

maximumm growth before decline

What is contraction/ recession in the economic cycle

Decline in economic activity

What is the trough in the economic cycle

lowest point before recovery

Why are histroical cycles important?

Predictive power, policy planning, cultural insight.

Why is predictive power important in histrical cycles?

Recognizing patterns can help economist, policymakers, and histrians anticipate trends.

Why is policy planning important in historicla cycles

Understanding cycles and guide decision-making to manage economic downturns, social unrest, or political instability.

Why is cultural insight important in historical cycles

cycles often reflect the evoloving values and priorities of societies.