Ch 20 - Macroeconomic Objectives: Low and Stable Rate of Inflation
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29 Terms
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stable inflation
Managing the change in the average price of level and achieving low and ________ rate → key objectives of government macroeconomic policy.
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**Inflation**
is the sustained increase in general price levels in an economy
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**Disinflation**
fall in the rate of inflation in an economy
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**Deflation**
sustained decrease in the general price levels in an economy
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**Consumer Price Index (CPI)**
the price index governments use to measure the rate of inflation
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**Demand pull inflation**
occurs when a rise in aggregate demand in the economy causes pulls in the price level in the economy to increase
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**Inflationary gap**
periods of demand pull inflation lead to inflationary gap where the short run equilibrium is at a level of real GDP above the full employment level of income
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**Cost push inflation**
occurs when there is a reduction in the short run AS in the economy and price level is pushed up by rising costs
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**Wage push inflation**
when wage rises faster than output unit or average costs rise
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**Raw material costs**
cost push inflation can be caused by rising commodity prices when increase the cost of manufactured goods
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**Capital costs**
if the prices of machinery and equipment
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**Deflation**
negative rate of inflation where there is sustained fall in the general level of prices in an economy
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**Demand side deflation**
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deflation can occur because of a fall in AD and typically occurs in a recession
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**Supply side deflation**
deflation that occurs on the supply side arises when the AD curve shifts to the right and leads to a higher output at lower prices
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**Phillips curve**
graph which represents the rate of unemployment and rate of change of money wages. Indicated that wages tend to rise faster when unemployment is low
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Inflation
is the sustained increase in general price levels in an economy
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Disinflation
fall in the rate of inflation in an economy
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Deflation
sustained decrease in the general price levels in an economy
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→ Consumer Price Index (CPI)
the price index governments use to measure the rate of inflation
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Demand pull inflation
occurs when a rise in aggregate demand in the economy causes pulls in the price level in the economy to increase
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Inflationary gap
periods of demand pull inflation lead to inflationary gap where the short run equilibrium is at a level of real GDP above the full employment level of income
22
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Cost push inflation
occurs when there is a reduction in the short run AS in the economy and price level is pushed up by rising costs
23
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Wage push inflation
when wage rises faster than output unit or average costs rise
24
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Raw material costs
cost push inflation can be caused by rising commodity prices when increase the cost of manufactured goods
25
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Capital costs
if the prices of machinery and equipment
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Deflation
negative rate of inflation where there is sustained fall in the general level of prices in an economy
27
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Demand side deflation
deflation can occur because of a fall in AD and typically occurs in a recession
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Supply side deflation
deflation that occurs on the supply side arises when the AD curve shifts to the right and leads to a higher output at lower prices
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Phillips curve
graph which represents the rate of unemployment and rate of change of money wages