Inflation Flashcards
What is inflation
It is the sustained rise in the general price level in one year as measured by changes in the consumer price index
What does inflation cause
A rise in the cost of living and a fall in the value or purchasing power of money
What is dis inflation
It describes a situation in which the inflation rate is rising but at a slower rate
What is deflation
It refers to the situation in which average prices are falling
What is price stability
Refers to the situation when the average price level is constant and there is no inflation
What is Hyper-inflation
It describes a situation in which average prices rise extremely quickly
Causes money to lose value by a lot
What are the 3 causes of inflation
Demand pull
Cost push
Expectations of inflation
What is demand pull inflation
It is the increase in prices caused by an increase in AD
Pressure of prices is worse when the economy is near full capacity
What causes demand pull inflation
Increased C
Increased I
Increased G
Increased (X-M)
Excessive growth of money supply
What is cost push inflation
The decrease in supply caused by higher supply costs
What causes cost push inflation
Rising raw material costs
Rising cost of labour
Higher business taxes
Depreciating exchange rates
What is expectations of inflation
It is when people expect inflation in the future so people do things that cause inflation
What are the 2 things people do when inflation is expected
The wage price spiral
Spend more by bringing their spending forwards to avoid increased prices
What is the wage price spiral
It is when workers ask for higher wages which causes the companies costs to increase
This causes the firm to increase their prices and the general price level increases
This causes inflation and loops back to asking for higher wages
What things cause both demand pull and cost push inflation
Rising wage rates
Depreciating exchange rates
Which inflation is seen as better
Demand pull inflation is better because it also causes GDP growth as well as inflation
What is the inflation target
2%
Who is responsible for inflation
Monetary Policy Committee of the bank of England
What are the costs of inflation
Smaller purchasing power for people
It redistributes money from savers to borrowers
Menu Costs
Shoe leather costs
Less competitive in international trade
Harder to tell which goods and services are better and more efficient
Causes higher interest rates
What are menu costs
It is the costs for firms of changing things which have the prices on them
e.g. menus
What is shoe leather costs
The extra time to find the most competitive supplier of goods
What are the benefits to inflation
It reduces the real money value of large national debts
Asset price inflation e.g. rising house prices
Removing inflation will cause a fall in AD
Government plays money illusions on how much they are spending on somethings
How do you deal with demand pull inflation
Decrease AD
How do you deal witn cost push inflation
Increase SRAS
How do you deal with inflationary exceptions
Persuading people there is no future inflation
What policies are used to deal with demand pull
Higher interest rates
Reducing money supply
Raising the exchange rate
Increase Taxes
Decrease gov spending
Supply side
what policies are used to deal with cost push if there is wage inflation
Control wage levels of public sector workers
Freeze or lower national minimal wage
Ban firms increasing wage by more than a certain amount
supply side
What policies are used to deal with cost push if there is commodity price inflation
Change exchange rates
Supply side
What policies are used to deal with cost push inflation if there is higher domestic costs
Subsidies
Deregulation
supply side
