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Shoe leather costs The term comes from the notion that people will
cope with inflation by keeping less cash on hand and making more
trips to the bank. In times of inflation, interest rates usually go up, so
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keeping as much money as possible in interest-bearing accounts can
Demand pull: increases in the price
be a good strategy.
level caused by increases in AD
Fiscal drag peoples income being dragged into higher tax brackets
AD= G + I + C + (X-M) as a result of tax brackets not being adjusted with inflation.
Loss of international competitiveness imports become relatively
Cost push: increases in the price level cheaper and exports become dearer
caused by increased factors of Monetary policy response increased nominal interest rates;
production. negative effect on output and investment
Higher Stock Values - Stocks bought at an earlier value, could rise in price and
sold off at a higher price bringing higher profitability. www.studyguide.pk
Loss of income
Real wage unemployment Increased govt spending welfare benefits and job seekers allowance leading to increased in the budget deficit
Demand deficient Social costs - Rising unemployment is linked to social deprivation
unemployment Negative multiplier effects - One persons spending is anothers income so to lose well-paid jobs can lead to a drop in
Frictional unemployment demand for local services, downward pressure on house prices and second-round employment effects for businesses
Structural unemployment
supplying the factor or plant that closed down.
Claimant count Loss of national output - Unemployment involves a loss of potential national output (i.e. GDP operating well below
Causes of: potential) and is a waste of scarce resources. If some people choose to leave the labour market permanently because
ILO they have lost the motivation to search for work, this can have a negative effect on long run aggregate supply and
thereby damage the economys growth potential. Some economists call this the hysteresis effect. When
Labour force survey Measures of: unemployment is high there will be an increase in spare capacity - in other words the output gap will become
negative and this can have deflationary forces on prices, profits and output.
Time to explore job opportunities Benefits of:
Consequences:
Benefit from govt training and education,
could gain more rewarding jobs
Help to avoid inflation
Firms are able to expand
Unemployment
Reduction:
Pound
Exchange rate
Price of once currency in terms of another
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Economic growth
Short run; increase in real GDP.
Long run; increase in productive capacity (maximum output the economy can
produce).
LRAS or potential growth can increase for the
following reasons