Chapter 31 Inflation and Deflation Flashcards
Define inflation
Rise in the general price of goods and services over time
Define deflation
A fall in the general price of goods and services over time
Define disinflation
A fall in the rate of inflation
What is a consumer price index
a measure of the weighted average of the prices of a representative basket of goods and services
How to calculate weighted price index
Decide on base year
decide on basket of goods
work out what proportion of spending is taken up by each good (weight)
Measure prices usin a price survey
Work out the percentage change in each price
Multiply the change in price by the weight to get the weighted price changes
add up the weighted price changes to get a measure for inflation
What are the causes/types of inflation (2)
Cost push inflation
- Inflation caused by the increased costs of production
-When factors of production gets more expensive firms have to raise prices in order to cover the higher costs and protect their profit margins
- increased costs due to wages, energy prices, and commodity prices
Demand -pull inflation
-Inflatiion caused by too much spendin gin an economy
-Occurs when demand increases in an economy whihc is operating at or close to full potential (no supply to meet demand)
- When too much money is printed (monetary inflation)
What are the positive consequences of inflation (2)
If reason for inflation is demand pull, firms may be encouraed to expand
reduced burden of debt built up, people spend more meaning more economic growth
What are the negative consequences of inflation
Causes a fall in the value of money
- If prices are rising, each unit of money will buy fewer products
-Higher inflation —-> greater fall in purchasing power
redistributes income in an unplanned way
Inflation creates uncertainty
-Firms discouraged from investing
-Difficult to plan ahead for firms and households
Harm a country’s balance of payments
-Higher inflation —> less price competitive
Cause fiscal drag
- if govt dont adjust tax bracket people might get dragged into higher tax brackets being left with lower deal disposable income
Causes of deflation (2)
Demand side deflation
- Too little spending
- firms reduce price —> reduce output —> less demand for labour and unemployment increase
Supply side deflation
- Lower costs of productions
- Could be caused by improved productivity
Consequence of delation on wages
Real value of wages increases, making it difficult for firms to afford costs as revenue falls because of the fall in price. Firms may fire workers as a result
Consequence of deflation on debt
Value of debt increases and borroweres have to pay more, making borrowing less attractive
Consequence of deflation on savings
Value of savings increases so saverse benefit, savings more benefit and spendng falls
