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ECONOMICS > Inflation > Flashcards

Inflation Flashcards

1
Q

definition

inflation

A

A sustained rise in the general price level

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2
Q

common measures of inflation

CPI or RPI

Consumer price indext or retail price index

A

meaures the changes in prices of a weighted basket of goods bought by consumers over a given period of time

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3
Q

common measures of inflation

PPI

producer price index

A

a weighted basket of final goods & services and intermediate goods in the production process. e.g. raw materials

Leading indicator for changes in CPI *if producer prices increase is likely to be pased down to consumers

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4
Q

common measures of inflation

GDP deflator

A

used to convert GDP nominal figures to real figures.

Also includes goods and services produced by governments.

CALCULATION
(Nominal GDP/Real GDP) X 100

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5
Q

terminology

inflation rate

A

the percentage change in prices from one period to another

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6
Q

terminology

defelation

A

a persistent fall in the general price level

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7
Q

terminology

Disinflation

A

a general rise in price levels BUT at a lower rate of inflation

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8
Q

terminology

core or underlying inflation

A

a measure of inflation excludes volatile prices in the basket e.g excludes prices of oil/energy prices that might br manipulated

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8
Q

terminology

hyperinflation

A

inflation that is out of control!

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9
Q

creeping inflation

A

inflation that is presistently at 2 or 3% e.g inflation in EU in late 90’s

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10
Q

uncertainty and growth

consequences of inflation

A
  • uncertainty aboutt future prices
  • discourages long-term investment
  • growth is likely to be lowered
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11
Q

Redistributes income

consequences of inflation

A
  • borrowers benefit
  • lenders lose
  • people on fixed incomes lose
  • people on profit incomes - raise their prices in line w/ inflation
  • importers benefit
  • exporters lose - worsenig the BoP
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12
Q

resource costs

consequences of inflation

A

changing prices means new menues, price lists, price lable

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13
Q

Fiscal drag

A

may push ppls incomes into a higher tax bracket in a progressive tax system

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14
Q

erodes functions of money + price mechanism

consequences of inflation

A
  1. commodity of exchange
  2. means of deferred payment
  3. store of wealth
  4. unit of account
  5. price mechanism - distorts resource allocation
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15
Q

consequences of deflation

A
  1. falling GDP & rising unemployment - can get stuck in deflationary trap
  2. falling prices & expectations of lower future prices = delayed consumption at present = AD falls = prices fall even lower
  3. business profits will fall - have to accept new price, unlikely to reduce costs
  4. real debt values will increase
  5. indebtedness discourages firms from making new investments
  6. monetary policy (expansionary) becomes ineffective as a tool.
  7. exports might becaome more competitive
16
Q

cost pull inflation

A
17
Q

Demand pull inflation

A
  • caused by an increase in AD causing a rise in APL
  • C & I might incrrease due to an optimistic and confident households or firms
  • X might rise rapidly due to faster income growth in other countries
  • G is often the cause of demand pull inflation - irresponsible overspending by governments or generous tax cuts.
18
Q

cost push inflation

A
  • caused by a rising cost of production (stagflation)
  • prices are rising and output is falling - unemployment is also rising
  • illustrated by SRAS shift to the left
  • caused by oil shocks, falling exchange rate, increase in indirect taxes
19
Q

combined DD pull and Cost push

A

results in a **wage price spiral **
- e.g. unions ask for higher wages, causing SRAS to move to the left - then AD is increased causing even higher prices = demand for further wage increases
- an increase in AD to combat slowing growth - causes APL to rise
- overall results in SRAS to shift left

20
Q

Solutions to Demand pull inflation

A

contractionary monetary or fiscal policy
- gov. would decrease its spending or raise taxes
- will decrease G + consumer consumption by decreasing disposible income
- raising interests - discourage I and C
- might encourage savings

  • idea is to slow AD increases
21
Q

solution to cost push inflation

A
  • supply side policies - aim to reduce costs of production & move SRAS to the right, lowers APL and higher level of real output

ECONOMICS (5 decks)

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