Inflation Flashcards
Def Inflation
Sustained increase in an economy’s price level
creeping inflation
2% inflation - perceived as a good thing as it encourages firms to produce more
hyperinflation
50% and more, result in people losing confidence in the currency
Consumer Price Index
an index that shows the average change in prices of a representative basket of products purchased by households
Money value
Values at the price operating at the time
real value
values adjusted to inflation
Cost push inflation
Inflation caused by increases in cost of production
wage price spiral
gain wage rise, causes price to increase, workers seek higher wages
Cost push inflation causes
Increase in Costs of production (AS), fall in exchange rate
Demand Pull Inflation causes
Increase in AD not matched my an equivalent increase in AS
Demand pull inflation DEF
Inflation caused by increases in aggregate demand not matched by equivalent increases in aggregate supply
Monetarists
Economists who consider that inflation is caused by an excessive growth in money supply
Consequences of inflation
reduction in net exports, menu costs, shoe leather costs, fiscal drag
Menu costs
costs to firms of having to change prices due to inflation
shoe leather costs
costs of moving money around in search of the highest interest rate
Fiscal drag
the income of people and firms being pushed into higher tax brackets as a result of inflation
Inflationary noise
confusion over relative prices caused by inflation
Potential benefits
Stimulating output, Reduce debt burden, prevent unemployment
How does inflation stimulate output
Low and stable inflation caused by increasing demand may make firms fell optimistic about the future. Prices rise more than cost - profits will increase
Top Tip Inflation
Inflation is not always bad, wages might rise more than price
Deflation
sustained fall in the price level
Disinflation
a fall in the inflation rate
Deflationary policies
reduce AD
