3.4 Price Stability Flashcards
Cost of living
The price level of goods and services bought by the average family
Inflation
A sustained rise in the general price levels over time
Price stability
When the general level of prices stays constant over time or grows at an acceptable low rate (2%)
Rate of inflation
The percentage rise in general price level over time
Whats the difference between real and nominal values
Nominal- The numerical value of the price
Real- What the price would actually be after inflation
How do you measure inflation
Consumer price index
What is the consumer price index and how does it work
It is a method to measure inflation
It is a basket of goods and services and the overall change in consumer prices is measured
What are the two causes of inflation
Demand pull and cost push
Explain demand pull inflation
When there is too much demand so PL increase
What is cost push inflation
When there is a rise in general price levels because of an increased cost of production
Give 3 reasons why cost push inflation would occur
- Cost of raw materials
- Higher taxes
- Weather
Explain thw wage price spiral starting with a general increase in price level
A general increase in the price level
Workers demand higher wages
Increased cost of production
Firms raisse prices
Rising inflation
Falling real incomes
So then workers demand higher wages and it starts all over again
What are consequences of inflation for consumers (5)
- Loss of confidence- dk when to buy goods
- Shoe leather costs
- Fall in real incomes
- Consumers with debt gain
- Income redistribution
What are consequences of inflation for producers (5)
- More flexibility as they could give their employees real wage cuts but nominal pay increases
- Menu costs
- Labour market/ trade union conflicts
- Unemployment
- Producers lose as creditors e.g. banks
What are consequences of inflation for savers
The real value of their money will decrease by alot
