4) Inflation 2 - MB

Question 1

Define cost push inflation

Answer 1

Inflation initiated by an increase in the costs faced by firms, arising in the supply size of the economy

Question 2

Define demand-pull inflation

Answer 2

Inflation initiated by an increase in aggregate demand

Question 3

Define money stock

Answer 3

The quantity of money in the economy

Question 4

When does inflation occur?

Answer 4

When there is a rise in the general price level

Question 5

How can we model changes in the price level?

Answer 5

With the AD/AS model

Question 6

A… increase in the price level is different to a… in the price level over a long period of time

Answer 6

• one off
• sustained rise

Question 7

What do one off change in the price level not suggest?

Answer 7

Do not suggest that inflation will persist in the long run

Question 8

When does persistent inflation take place?

Answer 8

Can take place only when the money stock grows faster than real output

Question 9

Analyse a leftward shift in SRAS

Answer 9

Shift from SRAS0 to SRAS1 has occurred, perhaps due to an increase in production costs caused by an increase in the price of oil. This leads to an increase in the price level from P0 to P1 and real GDP falls from Y0 to Y1. (This could be one off and not inflation)

Question 10

Analyse a rightward shift in AD

Answer 10

A rightward shift in AD has occurred from AD0 to AD1, perhaps due to an increase in consumer expenditure. Investment would also increase AS and overall impact is unclear. As Aggregate demand is already on the vertical section of the AS curve, and the economy is already at full employment (YFE), the increase in the price level without also increasing economic growth

Question 11

If money stock grows faster than output what happens to purchasing power for firms and households?

Answer 11

Firms and households have excess cash; for a given price level they have more purchasing power

Question 12

What happens to AD if the money stock grows faster than output?

Answer 12

Firms and households increase spending, shifting AD right

Question 13

Why does AD also further increase if the money stock grows faster than output?

Answer 13

Firms and households save , lowering interest rates, further increasing AD

Question 14

AD shifts right due to money stock growing faster than output, what does this cause for the price level?

Answer 14

It increases the price level back to the full employment equilibrium

Question 15

What happens if money supply continues to increase?

Answer 15

The process repeats, with prices rising persistently

Question 16

When money stock grows faster than output, what do firms and households do that further increase the rate of inflation?

Answer 16

When money stock grows faster than output, it changes expectations of firms and households, who speed up spending decisions, further increasing the rate of inflation

Question 17

When money stock grows faster than output, what can happen if this is unchecked?

Answer 17

This leads to hyperinflation