2.3 Inflation Flashcards
What is inflation?
A persistent increase in the price level of an economy of a period of time.
What is disinflation?
Fall in the rate of inflation.
What is deflation?
Decrease in the price level of an economy over a period of time.
What is the core or underlying rate of inflation?
Measurement of inflation eliminating the effect of volatile swings in prices.
How is inflation measured?
CPI = Consumer price index = changes in price of goods by an average household.
What are the consequences of inflation?
Reduces real value of income/savings
Wages can’t increase with it
Uncertainty causes less investment and consumption
Loss pf purchasing power
More costs by searching for best costs
Costs of constantly looking at prices.
Consequences of deflation (positives of inflation)
High level of cyclical unemployment and bankruptcies.
How to cure inflation?
Contractionary fiscal policy and or contractionary monetary policy.
What causes demand pull inflation?
^AD without response in ^AS
What causes demand pull inflation?
vTaxes ^gov spending
How to cure demand pull inflation?
^AD = contractionary policies.
What is Cost push inflation?
v AS because of rising costs of production
This causes AS to shift up causing Price level to decrease.
Fall in AS = CURVE MOVES UP.
