Chapter 10: Inflation Flashcards
What are the 3 main effects of inflation?
Distribution effect: benefits debtors over creditors because value of money falls when prices increase. Government benefits because it is always a debtor. Tax bracket creep when prices increase but tax brackets remain.
Economic effects: Speculation instead of real investment. Also can cause balance of payment problems depending on prices in main trade partner countries. Rand depreciates, drives export, drives higher prices.
Social and political effects: causes strife
What is demand-pull inflation?
Demand increases and supply remains unchanged.
Excess demand pulls-up the prices.
From increase in C, I, G, X and also increases money stock.
What is cost-push inflation?
Increase in production costs push up the prices.
- Increased wages and salaries
- Cost of capital and intermediate goods
- Increased profits
- Decreased productivity
- Natural disasters
