Inflation Flashcards
Two reasons for inflation?
Demand pull
Cost Push
What causes Demand Pull inflation?
Lower interest rates Lower income or corporate tax Increase in consumer business confidence Government spending Weak exchange rate
What is Demand push inflation?
Inflation caused by increased production as consumption increases
How would you illustrate inflation?
Keynsian Graph
Cost push inflation causes
Raw material prices
Wages
Business taxes
Price of imported raw materials increases because of weaker exchange rate
What causes Cost push inflation?
Increased in production costs not caused by consumption i.e. raw materials become more expensive
Cons of inflation
Reduction in purchasing power Menu costs Shoe leather costs Fiscal Drag Reduced International competitiveness Anticipated inflation (inflation spiral) Consumers will buy more now
Benefits of Inflation
Workers can get an increase in pay
Incentivises production
Less unemployment in recession (firms will hold their workers)
Promotes more healthy consumption (buy it now or loose it)
Monetary Policies to reduce inflation
Interest rates, cost of deposit for mortgage, Quantitative easing
Fiscal policies to reduce inflation
Taxes, government spending/ loaning, subsidies
Why might fiscal policies not be effective in reducing inflation?
It’s possible to wait it out, it’s very difficult to change a change in supply such as a raw material becoming more expensive as it becomes more rare.
Inflation
A persistent increases of prices in a year in an economy
