INFLATION

Question 1

What is Inflation

Answer 1

peristent increase
in average price level
across an economy
over a period of time

Question 2

Two types of Inflation

Answer 2

Demand Pull
Cost Push

Question 3

What is Demand Pull Inflation

Answer 3

When AD shifts to the right

Question 4

What happens with demand pull inflation (graph wise)

Answer 4

higher economic growth (y1-y2)
but crucially
demand pull inflationary pressure (from p1-p2)

Question 5

What’s the key fact on why DP inflation happens

Answer 5

AD shifts right

so we see greater pressure on existing FOP to produce more output

More output is made and we get closer to full emplyment

due to the increase in pressure making the FOP more scarce they go up in price e.g labour wages and capital

this increases COP for firms and they pass higher costs on via prices and services at the end causing DPI (WHEN AD SHIFTS RIGHT ?)

Question 6

What can cause AD shifting to the right (DPI)

Answer 6

decrease IR
decreasing INCOME/CORP TAX
increasing CONSUMER/BS CONFIDENCE
increasing GOV SPENDING
weaker EXCHANGE RATE

Question 7

Why does lower IR cause DPI , begin with recalling the components of AD

Answer 7

(C)Cheaper for consumers to borrow and spend
(I)Cheaper for Businesses to borrow and invest
(X-M)Weakens exchange rate and bossts net exports

Question 8

Why does decreasing income/corp tax cause DPI

Answer 8

INCOME - increases disposable income for consuemrs to spend , boosting their MPC?
CORP - increases retained profit for firms to invest

Question 9

What how does increase in consumer and business confidence cause DPI

Answer 9

Increases consumption and investment