34 Inflation Flashcards

1
Q

Inflation

A

Increase in the average price level measured by a weighted basket of goods

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2
Q

Deflation

A

Decreases in average price level measured by a weighted basket of goods

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3
Q

Disinflation

A

A fall in the rate of inflation

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4
Q

Hyperinflation

A

Excessively high rate of inflation

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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
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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
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7
Q

Cause of deflation

A

Lack of aggregate demand resulting in lower output and possibly deflationary spiral

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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
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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
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