Questions and Answers
What is a demand side cause of inflation?
Which type of inflation results from a decline in aggregate supply?
What is a quantitative measure of credit control used by central banks?
What are the main objectives of fiscal policy?
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What does the IS curve represent in an economic model?
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What is an example of disequilibrium in balance of payments?
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What shift occurs when the IS curve moves to the right?
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What does the slope of the LM curve indicate?
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Study Notes
Inflation: Causes and Types
- Demand-side causes: Increase in consumer demand, government spending, or foreign investments can lead to inflation as demand outstrips supply.
- Supply-side causes: Rising production costs, such as wages and raw materials; supply chain disruptions can result in inflation as the cost of goods increases.
- Definitions: Inflation refers to the sustained increase in the general price level of goods and services in an economy over time.
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Types of Inflation:
- Demand-pull inflation: Occurs when demand exceeds supply.
- Cost-push inflation: Triggered by increasing costs of production leading to higher prices.
- Built-in inflation: Linked to adaptive expectations, where businesses and workers expect prices to continue rising.
- Stagflation effects: Characterized by stagnant economic growth, high unemployment, and high inflation; complicates policymaking and economic recovery.
Credit Control Measures by Central Banks
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Quantitative measures: Used to control the money supply and maintain economic stability through:
- Reserve requirements: Mandating banks to hold a certain percentage of deposits as reserves.
- Open market operations: Buying or selling government securities to influence the amount of money circulating in the economy.
- Discount rate: Adjusting the interest rate at which banks can borrow from the central bank affects overall lending rates.
Fiscal Policy Objectives
- Economic stability: Aims to stabilize the economy, manage inflation, and reduce unemployment.
- Resource allocation: Ensures that resources are allocated efficiently to support economic growth.
- Income redistribution: Seeks to promote social welfare and equity through taxation and public spending programs.
Types of Public Debt
- Internal debt: Money borrowed by the government from domestic lenders through loans and securities.
- External debt: Borrowing from foreign entities, which can include loans from other countries or international organizations.
- Government bonds: Represent long-term borrowing that must be repaid with interest, a common form of public debt.
IS Curve Derivation
- IS curve: Represents equilibrium in the goods market where investment equals savings; derived from the relationship between interest rates and level of income.
- Shift factors: Changes in government spending, investment, or taxes can shift the IS curve left or right, indicating a change in equilibrium income at a given interest rate.
LM Curve Slope Discussion
- LM curve: Reflects money market equilibrium where money supply equals money demand; its slope indicates the relationship between the money supply and interest rates.
- Factors affecting slope: A steeper LM curve suggests that significant changes in interest rates are needed to change the quantity of money demanded.
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Description
This quiz covers the various causes and types of inflation, including demand-side and supply-side factors. It also explores different types of inflation such as demand-pull, cost-push, and built-in inflation, as well as the effects of stagflation. Test your understanding of these crucial economic concepts!
