Inflation

Question 1

Inflation

Answer 1

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.

Question 2

Disinflation

Answer 2

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.

Question 3

Deflation

Answer 3

A decrease in the general price level of goods and services, occurs when the inflation rate falls below 0%.

Question 4

Demand-Pull Inflation

Answer 4

Inflation caused by an increase in demand when resources are scarce.

Question 5

Cost-push inflation

Answer 5

Inflation caused by an increase in prices of factor inputs / production costs.

Question 6

Causes of Demand-Pull Inflation

Answer 6

High consumer demand
Interest Rates go down.
Income tax/ Corporation Tax decrease.
Business/Consumer Confidence
Increased Govt. Spending
WPIDEC

Question 7

Causes of Cost-Push Inflation

Answer 7

Increased Raw Material prices
Increased Wages
Increased Indirect Taxes Tax
Increased imported material prices
Disrupted Supply-chains - eg. conflict

Question 8

Fisher’s Equation of Exchange

Answer 8

Money Supply X Velocity of Money = Price Level X Total Transactions

MV = PT

Question 9

Monetarist view of Fisher’s equation

Answer 9

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.

Question 10

Costs of Inflation

Answer 10

Reduction in living standards (esp. low-income HH)
Reduced international competitivness
Reduced incentive to save
Lost confidence
Shoe leather / Menu costs
Hyperinflation ?

Question 11

UK Govt. Inflation Objective

Answer 11

Low and Stable prices

2% (+/- 1%)

Question 12

Characteristics of Demand-side deflation

Answer 12

BAD / Malignant
Anticipated
Long term

Question 13

Causes demand-side deflation

Answer 13

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

Question 14

Characteristics of Supply-side deflation

Answer 14

Good / Benign deflation\
Short-term
unanticipated

Question 15

Causes of supply-side deflation

Answer 15

Falling factor input prices
Technological improvements
ER appreciation

Question 16

Consequences of deflation

Answer 16

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

Question 17

Deflationary Spiral

Answer 17

Occurs when falling prices cause further deflationary pressures to cut prices.

Only demand-side deflation
Expected further decreases in prices

Question 18

Solutions to deflationary spiral

Answer 18

Increasing money supply
Targetting higher inflation rate - increasing confidence
Expansionary fiscal policy.

Question 19

Evaluation of Deflation

Answer 19

Anticipated ?
Demand-side of supply-side ?
Duration ?