34 Inflation Flashcards
1
Q
Inflation
A
Increase in the average price level measured by a weighted basket of goods
2
Q
Deflation
A
Decreases in average price level measured by a weighted basket of goods
3
Q
Disinflation
A
A fall in the rate of inflation
4
Q
Hyperinflation
A
Excessively high rate of inflation
5
Q
Policy and objective of low and stable inflation
A
- provides price stability- Price level does not change or if change is very small it might not affect decisions significantly
- business and consumer confidence is promoted because they can factor their inflationary expectations nit their consumption and investment decisions - clearer expectation of the real value of money and return on investment
- high and volatile rates of inflation distorts price signals (which helps allocate scarce resources)- they also distort the price signalling function and also distort signals about purchasing power of their income and could lead to higher wage demands leading to cost-push inflation
6
Q
Causes of inflation
A
- demand-pull inflation - a result of a rise in aggregate demand in excess of aggregate supply , more significant when the economy experiences a rise in aggregate demand demand at a time of full employment
- cost-push inflation - a rise in the cost of production causes prices to rise on the supply side of the economy
7
Q
Cause of deflation
A
Lack of aggregate demand resulting in lower output and possibly deflationary spiral
8
Q
Consequences of deflation
A
- deflationary spiral - lower prices result in households and firms delay purchases in expectation prices will lower further therefore firm reduce output unemployment rises and then lower aggregate demand more downward pressure
- reduce confidence which reduces effectiveness of any government policy measures designing to increase activity
- bad deflation will change peoples expectation and behaviour - banks are likely to experience defaults on loans and worry about households ability to pay
- deflation van increase the burden debt on households, firms and governments. The amount that has to be repaid rises in real terms and this can further reduce C+I+G
- falling prices as a result of greater total factor productivity can increase the international competitiveness of a country export which improves the current account position on the balance of payments and increases the firms output and can help reduce unemployment as AD rises
9
Q
Consequences of inflation
A
- fall in value of money reduction in the real value of income and the purchasing power of income assuming incomes do not rise with the rate of inflation
- reduction in the real rate of interest and the return on savings and investments in the future
- uncertainty - about the costs of production and therefore unwilling to invest and consumers uncertain about value of income and could be confused whether to consumer or save
- loss of international competitiveness of exporting firms, inflation can erode the price competitiveness of exports and it also reduces the price competitiveness of domestically produced products compared to imports
- fiscal drag - people are dragged into higher tax brackets so pay higher proportion of income and fall of disposable income