inflation Flashcards
what is inflation
the sustained increase in prices and a fall in the puchasing power of money
what is disinflation
inflation at a slower rate
what is the gov inflation target
2%
what are the main causes of inflation
-demand pull
demand for products is higher than supply meaning businesses are able to raise prices caused by an excessive growth in AD
-cost push
costs of production increase so to gain profit businesses must also increase prices
-change in indirect taxes
what can cause demand pull inflation
-rise in GDP
-increased consumer confidence
-full employment of resources
what is the wage spiral
as prices go up, real income goes down, meaning people demand for a wage increase. once given a wage increase they will have more disposable income to spend and businesses will once again raise prices.
how is inflation measured
the cpi and rpi
what can cause cost push inflation
-a natural disaster can reduce supply by damaging raw materials
-an increase in VAT
-depreciation in exchange rate makes imports more expensive
-rising labour costs
why is inflation an economic probnlem
-negative real interest rates
-falling real income
-business uncertainty
-increased saving
-decreased consumer confidence
-reduced business competitiveness
what are the effects of inflation on consumers
-low income households will suffer the most as the price of necessities increases
-the purchasing power of money decreases
what are the effects of inflation on businesses
-with high inflation interets rates are likely to be higher, making the cost of investment higher.
-workers will demand higher wages so business costs rise
-high product prices makes firms less price competitive
-business confidence will decrease
how can high inflation lead to unemployment
