Ch 20 - Macroeconomic Objectives: Low and Stable Rate of Inflation

stable inflation

stable inflation

Managing the change in the average price of level and achieving low and ________ rate → key objectives of government macroeconomic policy.

Inflation

is the sustained increase in general price levels in an economy

Disinflation

fall in the rate of inflation in an economy

Deflation

sustained decrease in the general price levels in an economy

Consumer Price Index (CPI)

the price index governments use to measure the rate of inflation

Demand pull inflation

occurs when a rise in aggregate demand in the economy causes pulls in the price level in the economy to increase

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

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

Wage push inflation

when wage rises faster than output unit or average costs rise

Raw material costs

cost push inflation can be caused by rising commodity prices when increase the cost of manufactured goods

Capital costs

if the prices of machinery and equipment

Deflation

negative rate of inflation where there is sustained fall in the general level of prices in an economy

Demand side deflation

deflation can occur because of a fall in AD and typically occurs in a recession

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

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

Inflation

is the sustained increase in general price levels in an economy

Disinflation

fall in the rate of inflation in an economy

Deflation

sustained decrease in the general price levels in an economy

→ Consumer Price Index (CPI)

the price index governments use to measure the rate of inflation

Demand pull inflation

occurs when a rise in aggregate demand in the economy causes pulls in the price level in the economy to increase

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

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

Wage push inflation

when wage rises faster than output unit or average costs rise

Raw material costs

cost push inflation can be caused by rising commodity prices when increase the cost of manufactured goods

Capital costs

if the prices of machinery and equipment

Deflation

negative rate of inflation where there is sustained fall in the general level of prices in an economy

Demand side deflation

deflation can occur because of a fall in AD and typically occurs in a recession

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

Phillips curve

graph which represents the rate of unemployment and rate of change of money wages