Definition deflationary gap – This is the difference between the full employment level of output and actual output. For example, in a recession, the deflationary gap may be quite substantial, indicative of the high rates of unemployment and underused resources. A deflationary gap is also known as a negative output gap. Causes of deflationary gap Fall …
This theory suggests that consumer spending patterns are heavily influenced by the way goods are presented. Changing the way goods are sold/presented to a consumer can strongly influence what is bought. Choice architecture is a method to retain consumer sovereignty (the right to choose) but nudging consumers to make certain choices. The idea of choice …
Flexible labour markets involve a minimum of government regulations. Flexible labour markets imply that wages and conditions are determined by market forces and not governments or trades unions. Flexible labour markets have the following features: Easier to hire and fire workers Limited, if any, regulations Downward pressure on wages Greater variety of job contracts, e.g. …
Inflation targeting means Central Banks are responsible for using monetary policy to keep inflation close to the agreed target (usually around 2%). Since the mid-1990s, inflation targeting has become widely adopted by developed economies, such as UK, US, and the Eurozone. Inflation targets were introduced to help reduce inflation expectations and help avoid the periods …
Readers Question: What is the relationship between inflation & economic growth? If economic growth is caused by aggregate demand (AD) increasing faster than productive capacity (LRAS) – if economic growth is above the ‘long-run trend rate‘ then economic growth is likely to cause inflation. If economic growth is caused by increased productivity (LRAS), then the …
What causes price fluctuations for the supplier in an agricultural market such as coffee/tea? Coffee and tea are agricultural products, and therefore supply can be variable depending on several factors behind the control of producers (weather, disease). Furthermore, because demand and supply are inelastic, any change in supply can cause a significant change in price. …