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Economics A-level > 3.3 Inflation and Deflation > Flashcards

3.3 Inflation and Deflation Flashcards

1
Q

What was inflation and deflation like in the 1960s-1990s

A
  • unnaceptably high rights of inflation

-

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2
Q

What was inflation rate like through 1993-2008?

A
  • under control
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3
Q

What was inflation like after 2008?

A

concern was mainly deflation due to recession

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4
Q

What is demand pull inflation caused by and what is it?

A
  • caused by excess aggregate demand for goods and services
  • demand side of economy
  • too much money chasing too few goods and services
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5
Q

What are the 6 causes of demand pull inflation?

A
  • lower income tax ( increases disposable income)
  • lower interest rate (borrowing is more attractive and saving less rewarding)
  • general rise in consumption (higher incomes and consumer confidence)
  • improved availability of credit / money supply. (credit boom leading to more borrowing, consumption and investment increases_
  • a weak exchange rate (boost exports)
  • fast growth in other countries (increase demand for Uk exports)
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6
Q

What is monetarism?

A

economic theory that believes that money supply is the chief determinant of current dollar GDP in the short run and the price level over longer periods

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7
Q

What is cost push inflation?

A

when firms respond to rising costs of production by increasing prices

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8
Q

What are the causes of cost push inflation?

A
  • wage increases
  • stronger trade union power
  • higher raw material costs
  • higher taxes
  • higher import prices
  • natural disastors
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9
Q

How do wage increases cause cost push inflation?

A
  • wage is largest single cost of production
  • if prices are rising, workers will demand higher wages to protect real wages. if higher wage costs are reflected in higher prices, further pushing up inflation , workers continue to demand higher wages
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10
Q

How do stronger trade union power cause cost push inflation?

A
  • growth of monopoly power in labour market, in form of growing trade union strength for inflation
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11
Q

What will a rise in world price of commodities feed through to?

A

Uk inflation as many commodities are price inelastic products

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12
Q

What do all imported goods / commodities include?

A
  • raw materials, food, energy, consumer goods such as manufactured goods, capital goods and semi manufactured goods used for production
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13
Q

what are emerging markets creating a growing demand for ?

A

goods and services globally

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14
Q

What has the growing demand for good and services globally led to?

A

demand pull inflation
- during boom, Uk imports inflation from booming economies through imported food and raw materials

  • during recession, Uk faces lower inflationary pressure
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15
Q

What can peoples expectation of future inflation affect?

A

current rate of inflation
- if people expect the inflation rate next year will be high, they will behave in an inflationary way to avoid being left behind when expected inflation materialises.

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16
Q

What will people do when they suspect high inflation?

A
  • trade unions and workers bargain for higher wages

- firms rise prices

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17
Q

What are the consequences of low and stable inflation?

A
  • easy to anticipate next years inflation rate
  • associated with growing markets, healthy profits and business confidence
  • a necessary side effect or cost of expansionary policies to reduce unemployment
  • necessary to make labour markets function fully
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18
Q

Who are the winners from high inflation?

A
  • workers with strong wage bargaining power
  • debtors if real interest rates are negative
  • producers if prices rise faster than costs
19
Q

Who are the losers from high inflation?

A
  • retired on fixed incomes
  • lenders if real interest rates are negative
  • savers if real returns are negative
  • workers in low paid jobs
20
Q

What seven ways could inflation make the economy less efficient and competetive?

A
  • distributional effects
  • low or negative real income
  • distortion of normal economic behaviour
  • breakdowns in the functions of money
  • lack in int competitiveness
  • shoe leather and menu costs
  • business uncertainty
21
Q

Explain effect of distributional effects?

A
  • inflation acts as hidden tax, redistributing income and wealth from lenders to borrowers. people on fixed income loose out
22
Q

Explain the effect of low or negatice real income?

A
  • leads to low level of saving and high level of spending which may cause demand- pull inflation
23
Q

Explain effects of inflation on distortion of normal economic behaviour>

A
  • households bring forward purchases and hoard goods if they ecpect inflation rate to rise
24
Q

Explain effects of infaltion on breakdowns in the functions of money?

A
  • money becomes less useful and effecient as a medium of exchange and store value
25
Q

How does inflation lead to a lack of international competitiveness>

A
  • when inflation is higher then in competitor countires, exports become more expensive, lower AD, lower growth and rising unemployment. exchange rate may fall, causes higher import prices and cost-push inflation
26
Q

Explain effect of inflation on shoe leather and menu costs?

A
  • consumers incur shoe leather costs, spending time and effort shopping around and checking which prices have or have not risen , incur menu costs, having to adjust prices more often
27
Q

Explain effect of inflation on business uncertainty?

A

high and volatile inflation is not good for confidence partly because businesss cannot be sure of what their costs and prices are likely to be

28
Q

What four policies could be used to reduce inflation?

A
  • monetary policy
  • fiscal policy
    supply side policies
  • direct controls
29
Q

What do policies that reduce inflation aim to do?

A

either:

  • slow down growth of AD
  • boost rate of aggregate supply
30
Q

Explain the monetary policy?

A
  • tighten monetary policy through, higher interest rates, reversal of quantitative easing or tougher controls on bank lending
31
Q
A
  • higher cost of borrowing ( borrowing falls)
  • saving is more attractive
  • reduces disposable income of those with mortgages
  • higher value of exchange rate leading to lower exports and higher imports
32
Q

Explain the fiscal policy?

A
  • government reduces its own spending or public and merit goods or welfare payments
  • by raising direct taxes (lower disposable income). could lead to lower output having a negative effect on jobs and economic growth
33
Q

Explain supply side policies?

A
  • increase porductivity, consumption and innovation
  • reduction in company taxes to increase investment
  • reduction in taxes which increases risk taking and incentives to work
34
Q

Explain the use of direct controls?q

A
  • public sector pay controls (limiting pay rises for NHS workers)
  • capping or other regulation of prices of utilities (water bills)
35
Q

What is the most appropriate way to control inflation in the short run?

A

for the government and central bank to keep control of AD to a level of consistent with out productive capacity

36
Q

What is deflation?

A

persistant fall in the general price level of goods and services

37
Q

What are the demand side causes of deflation?

A
  • deep fall in AD causing a persistant recession / depression
  • large negative output gap
  • falling real output and rising unemployment
38
Q

What are the supply side causes deflation?

A
  • improved productivity
  • technological advances
  • significant fall in wage rates
  • high exchange rate causing import prices to fall
  • rising real output and employment
39
Q

What are the seven consequences of deflation for individuals and the economy?

A
  • holding back on spending (expecting prices to fall)
  • debts increase ( lower consumer confidence)
  • real cost of borrowing increases (interest rates will rise, saving increases)
  • lower profit margins (reduce revenue for businesses, higher unemployment)
  • confidence and saving (falling asset prices, lower confidence)
  • income distribution (redistribution on income)
  • exporters more competitive
40
Q

What are the three policies to avoid inflation?

A
  • low interest rates and quantitative easing
  • fiscal stimulus measures
  • other ways of stimulating demand
41
Q

Explain how low interest rates and quantitative easing will avoid deflation>

A
  • cheaper loans for businesses and households

- expanding supply of credit in banking system

42
Q

Explain the fiscal stiumlus measures in deflation?

A
  • higher government spending
  • rise in government borrowing to inject demand into circular flow
  • lower direct taxes to increase disposable income and spending
43
Q

how did lower interest rates fail to solve low inflation?

A
  • people preferred to save becuase on ongoing recession
  • people took opportunity to pay off debts
  • banks didnt want to lend, firms couldnt get loans despite low rates
  • banks didnt pass the full base rate cut onto consumers

Economics A-level (35 decks)

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