economic performance Flashcards
define inflation
acpntinuing rise in the average price level
what happened to inflation in the financial crisis 2008
average price level fell
two basic causes of inflation
excess aggregate demand
general rise in the costs of production
define demand pull inflation
a rising price level caused by an increase in agreggate demand
how is demand inflation shown on a diagram
shift of AD curve to the right
why does the price level have to rise (demand-pull)
to encourage firms to produce beyond point on sras curve to meet excess demand
where is the equillibirum at after AD curve shifts
on LRAS as capacity has increased
what happens as a result ofn AD shifting to the right
reflation of real output and employment and inflation of the price level
define cost push inflation
a rising price level caused by an increase in the costs of production
how is cost push inflation shown on a diagram
a shift of the SRAS curve to the left on an AD/AS diagram
exmaples of rising productin costs
real wage-cost inflation
rising price of energy/commodities
what causes real wage cost inflstion
the growth of monopoly power in labour markets
trade unions in keynsian era collective bargaining increasing wages
what happens as SRAS shifts to the left
rise in price level and fall in national output as firms willing to produce less
global cause of import cost inflation
rise in world commodity price inflation
what happens when world economy is strong or in recesion to uk inflation
strong - imports inflation from other booming economies rising prices
recession- uk inflation is reduced
what would a fall in pounds exchange rate cause
imported cost push inflation
significant after 2008
quantity theory of money
old theory that inflation is caused by a persistent increase in the money supply
disadvantages of inflation
distributional effects
distortion of normal economic behaviour
international uncompetitiveness
distribution effects
weaker social groups in society will be worse effected
distortion of normal economic behaviour
diverting funds out of investment to unproductive hoarding and speculation
international uncompetitiveness
exports increase in price when inflation in uk is higher than competitor countries
lower growth and unemployment are likely result if there is a fixed exchange rate
three causes of deflation
fall in AD
negative multiplier effects
credit crunch
current account deficit
when currency outflows in the current account exceed inglows
current account surplus
when currency inflows exceed outflows
balance of trade in goods
the part of the current account measuring payments for exports and imports
net investment income
diiference between inward and outward flows of investment income
example of foreign direct investment
BP investing in the construction of an oil refinery in the US gold coast region
short run growth
One factor is fixed e.g capital
Long run growth
Both labour and capital are variable, economy is not at full capacity
Trend growth rate
That rate at which output can grow, on a sustained basis, without putting pressure on inflatiom