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91222 Glossary Flipbook PDF
91222 Glossary
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91223 GLOSSARY (INFLATION) TERM
DEFINITION
aggregate demand (AD)
The total demand for goods and services in the economy at each possible price level. AD = C + I + G + (X-M)
aggregate supply (AS)
The total supply of goods and services in the economy at each possible price level.
AS/AD model
An economic model which is used as a tool to understand changes in price level (inflation) and real output. It does this by adding together the activity in all markets in the economy.
boom
The phase in the business, or trade, cycle when real (actual GDP) is greater than potential GDP. This indicates that all resources are fully utilised. Booms are associated with inflationary pressure.
business confidence
Refers to firms feeling optimistic about future sales and profit levels. A rise in business confidence leads to increased investment by firms in anticipation of greater demand for their products. A rise in business confidence leads to an increase in AD.
business cycle (or trade cycle)
A model showing the short-term rises and falls in actual GDP compared with the long-term trend of potential GDP. These fluctuations are shown as a wavelike motion and typically follow four phases: an expansion or upturn, a boom, a contraction or downturn, and a recession.
consumer confidence
Refers to individuals and households feeling optimistic about future outcomes, based on job security and wage expectations. Increased consumer confidence implies that people will be more willing to spend. A rise in consumer confidence leads to an increase in AD.
Consumer Price Index (CPI)
An index of prices of the final goods consumed by an average household. The annual change in the CPI gives the rate of inflation.
consumption (C)
Spending by households on final (or consumer) goods for immediate use, e.g. food, clothing, and newspapers. Along with investment (I), government spending (G) and net exports (X-M), consumption (C) is a major component of aggregate demand.
cost-push inflation
Inflation caused by a decrease in aggregate supply, shown as a shift left of the AS curve. Factors such as increased costs of production, increases in indirect taxes and falls in productivity lead to a decrease in aggregate supply.
crude theory of money Assumes that the velocity of circulation and real output are constant so that any change in the money supply will lead to a change in the price level. deflation
A fall in the general level of prices (as indicated by a negative percentage change in the Consumer Price Index).
demand-pull inflation
Inflation caused by an increase in aggregate demand, shown as a shift right of the AD curve. An increase in consumption, investment, government spending or net exports leads to an increase in aggregate demand.
direct (income) tax
A tax on income, e.g. PAYE or company tax, which is paid directly by the taxpayer to the government.
TERM
DEFINITION
disinflation
A fall in the inflation rate, i.e. the general price level is rising but by a smaller percentage than before. (NOTE: You must indicate that it is the rate of inflation that is falling, and not say inflation is falling).
disposable income
Household income after income taxes are paid and any transfer payments are received, i.e. market income plus transfers less taxation. As a result of redistributive policies, household disposable incomes are likely to more evenly distributed, and more equitable.
equation of exchange
States that the money supply multiplied by the velocity of circulation equals the price level times the level of real output, i.e. MV = PQ.
general price rise
An increase, on average, in prices in the economy caused by costpush or demand-pull inflation.
government spending (G)
Expenditure by government on goods and services, including heath, education, roads, defence, and law and order.
household
One or more individuals living under the same roof, e.g. a family or student flatmates.
hyperinflation
Very high rates of inflation, caused by increases in the money supply.
indirect (sales) tax
A tax on spending, e.g. GST or sales tax, paid by the consumer and passed onto government by the firm selling the good or service.
individual price rise
A price rise in just one market caused by a decrease in supply or an increase in demand.
inflation
A persistent rise in the general level of prices.
inflationary expectations
Refers to households and firms anticipating a rise in the general level of prices. Higher inflation carries the risk of generating an upward drift in inflation expectations, and may give rise to workers making higher wage claims to compensate for reduced real wages. Firms may also set higher prices to maintain profit levels in the face of increased costs.
interest rate
The price of money. Borrowers pay interest to lenders as the price paid for the use the money. In this case, the interest rate is the cost of borrowing.
investment ( I )
An increase in the level of capital goods, e.g. a firm buying new machinery.
money supply
Includes all notes and coins in circulation plus people’s bank account balances.
net exports (X – M)
Export receipts less import payments, i.e. (X-M). Net exports, along with consumption (C), investment (I) and government spending (G), is a major component of aggregate demand.
nominal interest rate
The rate of interest which banks and other financial institutions display in branch offices and advertise in newspapers.
productivity
Measures output per unit of input. Productivity increases by means of improved technology; e.g. builders using nail guns rather than hammers have a better chance of increasing output.
TERM
DEFINITION
purchasing power of money
Refers to the ability of money, in the hands of individuals and households, to buy goods and services. If a fixed amount of income now buys less than before, the purchasing power of money has fallen.
quantity theory of money
Implies that there is a direct relationship between the money supply and the price level.
rate of inflation
The percentage change in the price level as measured by the CPI.
real interest rate
The nominal interest rate less the rate of inflation.
real output
The actual amount of goods and service produced in an economy in a year.
recession
The phase in the business, or trade, cycle when real (actual) GDP is less than potential GDP which indicates the underutilisation of resources. Recessions are associated with rising unemployment.
sophisticated theory of money
Assumes that the velocity of circulation changes but is relatively predictable so that inflation can be controlled by making changes to the money supply.
stagflation
The combination of inflation and stagnant (or falling) output in the economy.
transfer payments
Payments by government to households and producers for which NO goods or services are provided in return, e.g. unemployment benefit, sickness benefit, old-age pension.
trend growth path
The capacity of an economy to supply goods and services in a sustainable way (i.e. without the rate of inflation increasing over the medium term).
velocity of circulation
The number of times each dollar, on average, completes the circular flow in a year (i.e. travels from households to firms and back).