Presented To: Presented By:

Sir Minhaj-ul- Aziz Sajjad Mazhar

Course:
Class: Date:

Macro Economics
MBA - II 09-04-2012

Inflation
This is the process by which the price level rises and money loses value. There are two kinds of inflation: a) Demand pull b) Cost push

Demand pull inflation

Demand pull inflation may be due to : a)Increase in money supply b)Increase in government purchases c) Increase in exports

Cost push
Cost push inflation may arise because of : a) Increase in money wage rates b)Increase in money prices of raw materials.

Inflation

Inflation
Anticipated Inflation: Occurs where individuals and groups correctly factor in expected changes in inflation into decision making e.g. wage negotiations, contract discussions, etc.

Inflation
Unanticipated Inflation:
Where changes in inflation are not factored into decision making can lead to: Changes in distribution of income e.g.factoring in inflation above actual levels in wage negotiations may lead to a redistribution of income from employers to employees Effects on Employment e.g. wage settlements higher than inflation due to incorrect anticipation of inflation imposes costs on employers and may lead to job losses

Demand pull inflation

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

Cost Push Inflation

As costs rise it causes the aggregate supply curve to shift onwards so less is supplied at each price level Each time the aggregate supply curve shifts inwards the price rises causing inflation

Preventing inflation
One of the best ways to prevent inflation is through stock, variable annuities, and variable universal life insurance. These alternatives provide the potential for returns that exceed inflation over the long term. Central banks place high interest rates using unemployment and the decline of production to prevent price increases.

Unemployment
o Unemployed person: Someone who is out of work and: 1) Has actively looked for work in the last four weeks, or 2) Is waiting to be recalled to a job after having been laid off, or 3) Is waiting to report to a new job within four weeks.

Types of Unemployment

Types of Unemployment
Frictional Unemployment: Unemployment caused when people move from job to job and claim benefit in the meantime The quality of the information available for job seekers is crucial to the extent of the seriousness of frictional unemployment

Types of Unemployment
Structural Unemployment: Unemployment caused as a result of the decline of industries and the inability of former employees to move into jobs being created in new industries

Types of Unemployment
Seasonal Unemployment: Unemployment caused because of the seasonal nature of employment tourism, skiing, cricketers, beach lifeguards, etc.

The demand for lifeguard services tends to exist in the summer but nothing like as much in the winter an example of seasonal unemployment.

Types of Unemployment
Demand Deficient: Caused by a general lack of demand in the economy this type of unemployment may be widespread across a range of industries and sectors Keynes saw unemployment as primarily a lack of demand in the economy which could be influenced by the government

A fall in aggregate demand can lead to a decline in spending forcing businesses across the economy into closing with damaging effects on employment as a result.

Types of Unemployment
Technological Unemployment: Unemployment caused when developments in technology replace human effort e.g in manufacturing, administration etc.

Unemployment

Unemployment
Short run and long run unemployment:

Classical theory short run unemployment is a temporary phenomenon; wages will fall and the labour market will move back into equilibrium Long run unemployment will be voluntary

Figure 1 The Breakdown of the Population in 2001

Employed (135.1 million)

Labor Force (141.8 million)

Adult Population (211.9 million) Unemployed (6.7 million)

Not in labor force (70.1 million)

Copyright2003 Southwestern/Thomson Learning

Effects of Unemployment
Unemployment can have significance effects on the performance of the economy as a whole The effects are most marked due to long terms unemployment If there is unemployment in the economy resources are not being used effectively and the economy will be operating below any points on the PPF curve

Causes of Unemployment
Agriculture sector is not absorbing them due to adaptation of mechanical industries. Small scale industries of not working efficiently due to worse economic conditions. Poor Government policies are also increasing unemployment rate.