Inflation Flashcards
Inflation
A general progressive increase in the prices of Goods and Services in an economy, when the general price level rises, each unit of currency buys fewer goods and services.
Disinflation
A decrease in the rate of inflation – a slowdown in the rate of increase of the general price level of goods and services over a period of time.
Deflation
A decrease in the general price level of goods and services, occurs when the inflation rate falls below 0%.
Demand-Pull Inflation
Inflation caused by an increase in demand when resources are scarce.
Cost-push inflation
Inflation caused by an increase in prices of factor inputs / production costs.
Causes of Demand-Pull Inflation
High consumer demand
Interest Rates go down.
Income tax/ Corporation Tax decrease.
Business/Consumer Confidence
Increased Govt. Spending
WPIDEC
Causes of Cost-Push Inflation
Increased Raw Material prices
Increased Wages
Increased Indirect Taxes Tax
Increased imported material prices
Disrupted Supply-chains - eg. conflict
Fisher’s Equation of Exchange
Money Supply X Velocity of Money = Price Level X Total Transactions
MV = PT
Monetarist view of Fisher’s equation
In the SR, V+T are unlikely to change, therefore, by increasing Money supply, Price will increase
To avoid inflation, money supply should be carefully monitored.
Costs of Inflation
Reduction in living standards (esp. low-income HH)
Reduced international competitivness
Reduced incentive to save
Lost confidence
Shoe leather / Menu costs
Hyperinflation ?
UK Govt. Inflation Objective
Low and Stable prices
2% (+/- 1%)
Characteristics of Demand-side deflation
BAD / Malignant
Anticipated
Long term
Causes demand-side deflation
BAD
Falling AD / Lower growth
Fiscal austerity
global recession
fall in confidence
fall in money supply
Anticipated deflation
increasing value of debt
delayed spending
positive real interest rates
Long-term
Characteristics of Supply-side deflation
Good / Benign deflation\
Short-term
unanticipated
Causes of supply-side deflation
Falling factor input prices
Technological improvements
ER appreciation
Consequences of deflation
Discourages consumer spending
Increases the real value of debt
Increased real value of interest rates
Real wage unemployment
Deflationary Spiral / delayed demand
Tight monetary policy
Signals slow rate of growth
Deflationary Spiral
Occurs when falling prices cause further deflationary pressures to cut prices.
Only demand-side deflation
Expected further decreases in prices
Solutions to deflationary spiral
Increasing money supply
Targetting higher inflation rate - increasing confidence
Expansionary fiscal policy.
Evaluation of Deflation
Anticipated ?
Demand-side of supply-side ?
Duration ?
