INFLATION Flashcards
What is Inflation
peristent increase
in average price level
across an economy
over a period of time
Two types of Inflation
Demand Pull
Cost Push
What is Demand Pull Inflation
When AD shifts to the right
What happens with demand pull inflation (graph wise)
higher economic growth (y1-y2)
but crucially
demand pull inflationary pressure (from p1-p2)
What’s the key fact on why DP inflation happens
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 ?)
What can cause AD shifting to the right (DPI)
decrease IR
decreasing INCOME/CORP TAX
increasing CONSUMER/BS CONFIDENCE
increasing GOV SPENDING
weaker EXCHANGE RATE
Why does lower IR cause DPI , begin with recalling the components of AD
(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
Why does decreasing income/corp tax cause DPI
INCOME - increases disposable income for consuemrs to spend , boosting their MPC?
CORP - increases retained profit for firms to invest
What how does increase in consumer and business confidence cause DPI
Increases consumption and investment