4. Inflation

Inflation is a continual rise in the price level.

The price level is an index of all prices in the economy.

Types of inflation

1. Demand-pull inflation is inflation where money supply increases cause prices increases.

2. Cost-push inflation is inflation where prices increases cause money supply grows.

Expected inflation is inflation people expect to occur.

Unexpected inflation is inflation that surprises people.

Relationship between inflation and unemployment

Relationship between inflation and unemployment is shown on fig. 8.2.

Figure 8.2. The Phillips curve

Economic interdependence among nations

National economies do not exist in isolation but are increasingly interdependent.

Sometimes international flows of goods and services become a matter of political and economic concern. In 1999, exports to the United States of very low priced Russian steel threatened the jobs of U.S. steelworkers.

A related issue is the phenomenon of trade imbalances, which occur when the quantity of goods and services that a country sells abroad (its exports) differs significantly from the quantity of goods and services its citizens buy from abroad (its imports), creating a situation called a trade deficit.

5. Macroeconomic policy

We have seen that macroeconomists are interested in why different countries’ economies perform differently and why a particular economy may perform well in some periods and poorly in others. Although many factors contribute to economic performance, government policy is surely among the most important. Understanding the effects of various policies and helping government officials develop better policies are important objectives of macroeconomists.

Types of macroeconomic policy

We have defined macroeconomic policies as government policies that affect the performance of the economy as a whole, as opposed to the market for a particular good or service. There are three major types of macroeconomic policy: monetary policy, fiscal policy, and structural policy.

The term monetary policy refers to the determination of the nation's money supply. (Cash and coin are the basic forms of money, although as we will see modern economies have other forms of money as well.). In virtually all countries, monetary policy is controlled by a government institution called the central bank.

Fiscal policy refers to decisions that determine the government's budget, including the amount and composition of government expenditures and government revenues. The balance between government spending and taxes is a particularly important aspect of fiscal policy. When government officials spend more than they collect in taxes, the government runs a deficit, and when they spend less, the government's budget is in surplus. As with monetary policy, economists generally agree that fiscal policy can have important effects on the overall performance of the economy.

Finally, the term structural policy includes government policies aimed at changing the underlying structure, or institutions, of the nation's economy. Structural policies come in many forms, from minor tinkering to ambitious overhauls of the entire economic system. Many developing countries have tried similar structural reforms. Supporters of structural policy hope that, by changing the basic characteristics of the economy or by remaking its institutions, they can stimulate economic growth and improve living standards.