Answer to Question #46651 in Macroeconomics for Coleine

Question #46651
1.Identify the following as either associated or not associated with recessions:
a)decreased real output
b)worsening of the nation's balance of payments
c)loss of future output
d)slow down the rate of inflation

2.Define cost-push inflation. Using an AS/AD diagram, illustrate how cost-push inflation affects the level of aggregate output and the price level in the economy. Suppose that the government uses expansionary fiscal policy to counter the effects of the cost-push inflation. Indicate on the diagram the impact of this policy on the price level and level of aggregate output.

3.Define the Phillips Curve. Graphically illustrate the relationship between the inflation rate and the unemployment rate.

4.Evaluate the effects of anticipated and unanticipated inflation.
Expert's answer
1. Identify the following as either associated or not associated with recessions:
a) decreased real output is associated with recessions
b) worsening of the nation's balance of payments is associated with recessions
c) loss of future output is associated with recessions
d) slow down the rate of inflation is not associated with recessions.
2. Cost-push inflation is an alleged type of inflation caused by substantial increases in the cost of important goods or services where no suitable alternative is available. This can raise the normal or built-in inflation rate, reflecting adaptive expectations and the price/wage spiral, so that a supply shock can have persistent effects.
Cost-push inflation is inflation caused by an increase in costs. Cost-push inflation leads to an increase in the price level and a reduction in the level of aggregate output. If the government uses expansionary fiscal policy to counter the effects of cost-push inflation, aggregate output will increase and the price level will increase even more.
3. The Phillips curve is a historical inverse relationship between rates of unemployment and corresponding rates of inflation that result in an economy. Stated simply, decreased unemployment, (i.e., increased levels of employment) in an economy will correlate with higher rates of inflation.
4. The effects of inflation depends in part on whether inflation is anticipated or unanticipated:
Anticipated inflation:
When people/businesses can make accurate predictions of inflation, they can take steps to protect themselves from its effects. Households may also be able to switch savings into deposit accounts offering a higher nominal rate of interest or into other financial assets such as housing or equities where capital gains over a period of time might outstrip general price inflation. Companies can adjust prices and lenders can adjust interest rates.
Unanticipated inflation:
When inflation is volatile from year to year, it becomes difficult for individuals and businesses to correctly predict the rate of inflation in the near future. Unanticipated inflation occurs when economic agents (i.e. people, businesses and governments) make errors in their inflation forecasts. Actual inflation may end up well below, or significantly above expectations causing losses in real incomes and a redistribution of income and wealth from one group in society to another.

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