Chapter 4 Flashcards
inflation
is the persistent rise in the general price level
Cost push inflation
this is where an increase in the costs of production is forcing suppliers to increase the prices that they change to consumers.
demand pull inflation
if there is a rise in general demand from consumers and businesses and the supply remains the same
Restriction in supply of products
businesses may reduce their output of products (perhaps due to a
lack of available raw materials or due to government restrictions on demerit goods) which, in turn, forces
suppliers to increase their prices
Monetary Inflation
if there is too much money made available in an economy, for example through
greater availability of credit, then consumers will have access to more funds. This will lead to an increase
in spending, forcing prices to rise.
How does inflation and price instability cause impacts on the poorer sections of society more than the richer
If all or most prices are rising, the impact of inflation will be felt greater by poorer sections of society (and those
dependent on benefit payments, such as pensioners). This is because they will have fewer available funds to
match the increased costs of consumption but will still need to purchase necessities such as food and fuel.
How does inflation and price instability cause impacts on savers
If the inflation rate is greater than interest rates, then the value of money held in savings starts to decrease.
How does inflation and price instability cause impacts on businesses
A persistent increase in prices is likely to lead to wage increase demands from the labour force.
Businesses may
need to meet this demand to maintain steady employment and avoid strikes, and will therefore see an increase
in costs.
This could lead to a fall in profits for businesses
How does inflation and price instability cause impacts on the current account of the balance of payments
If UK prices are rising at a quicker pace than other countries, then UK products become less competitive. This
may mean that fewer countries purchase UK goods and UK consumers purchase more foreign goods. This can
cause a greater deficit in the current account of the balance of payments for the UK.
How does inflation and price instability change the decisions on what loans banks grant
If prices are rising at a rate that is higher than the interest a bank is charging on the loans it has granted, then
the value of that interest is lower for banks. This means that banks are less likely to approve loans during periods
of high inflation
why is deflation bad for the economy
during a
period of deflation, consumers do not spend as much money as they are waiting for better (lower) prices in the
future. This delay in consumer spending means a fall in demand for output from firms, who then in turn may
need to produce less and possibly make redundancies.
Hyper inflation
‘Hyperinflation’ is the rare condition that can occur when prices rise at a very high rate
Control demand
the government can attempt to curb a rise in demand. This can be achieved by
increasing direct taxation to reduce the amount of disposable income available for spending
Use interest rates to control demand
The primary method that the BoE would use is to raise interest rates to reduce general
demand.
Control costs
Control costs – the government can support the control of costs to reduce cost push inflation. For
example, it could reduce company taxes or regulate markets to make them more competitive and
efficient.
