Inflation

Question 1

Types of inflation

Answer 1

Cost push inflation - rising wages and commodity prices.

Demand pull inflation - When AD shifts right, but SRAS stays the same or shifts left.

Question 2

Types of deflation

Answer 2

Bad deflation (malevolent) - When consumers reduce spending in the hope prices will fall in the future.

Good deflation (benign) - Firms innovate reducing costs of production.

Question 3

Costs of inflation

Answer 3

*Fall in the real value of savings
*Fall in real incomes
*Reduced international competition
*Boom and Busts in the economic cycle eg. rapid UK economic growth in 1980s led to deep recession in 1991 due to high inflation rate.

Question 4

Policies to prevent inflation

Answer 4

*Increase interest rates
*Increase direct / indirect taxes
*Reduce government spending
*Reduce import taxes. (M increases)