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Inflation
Inflation- The rise in the general level of prices
In the long term, inflation erodes consumer purchasing
power.
That means that accumulated wealth buys less and less,
with the passage of time.
Where there is high inflation it is difficult for businesses to
plan for the future as there is uncertainty regarding the
cost of raw materials
As aggregate demand
increases then the general
price level rises
When total demand exceeds
total supply demand pull
inflation occurs
If the economy is close to full
capacity the effects of demand
pull inflation will be greater
COSTS OF INFLATION
Inflation is like a tax shoe leather
Redistributes income
Lenders loose, borrowers
gain
Distorts resource allocation
as inflation affects relative
prices
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AE Y
Preventing inflation
MEASURING INFLATION
MESURING INFLATION
(Contd..)
Step 4: Choose one as base year (2005) and compute the index)
2005: ($8/$8) X 100 = 100
2006: ($14/$8) X 100 = 175
2007: ($20/$8) X 100 = 250
Step 5: Use CPI to calculate inflation rate from previous year
2006: (175-100)/100X100 = 75%
2007: (250-175)/1175X100 = 43%
Unemployment
Structural unemployment
Cyclical unemployment
Frictional unemployment
Unemployment
scarce economic
resources are being
wasted reducing the long
run potential of the
economy
Where there are high
levels of unemployment an
economy will be operating
inside the perimeters of its
PPF
HOW UNEMPLOYMENT IS
MEASURED?
Unemployment and AD / AS
As Aggregate demand increases unemployment will
decrease
Supply side policies can be used to increase
aggregate supply in the economy and thereby
reduce the level of unemployment
However if the growth in the level of aggregate
demand is less than the underlying trend growth in
output unemployment is likely to occur
factors
On the demand side if the demand curve shifts
inwards unemployment will rise
Supply side factors such as an excess of supply of
workers also means unemployment will increase
Effects of Unemployment
Effects of Unemployment
Phillips Curve