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MR CUMMISKY ECONOMICS > Inflation > Flashcards

Inflation Flashcards

1
Q

What is the inflation 1 definition? (not economic one)

A

General increase in the average price level from one year to the next

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2
Q

What is the economic inflation definition?

A

Fall in the value of money

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3
Q

What is an index?

A

A system that measures changes in a set of variables that change by different amounts in different directions. Shows average movement

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4
Q

What are the 3 types of index?

A
  • consumer price index = price changes
  • FTSE 100 = share prices
  • sterling trade weighted index = exchange rates
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5
Q

What is demand pull inflation?

A

Occurs when there is an excess aggregate demand - positive output gap.

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6
Q

What are the main causes of demand pull inflation?

A
  • Depreciation in the exchange rate
  • reduction in direct and indirect taxation
  • rapid growth of the money supply as a consequence of increased bank & building society borrowing
  • rising cc and increase in rate of growth of house prices (wealth effect)
  • Faster rates of economic growth in other countries
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7
Q

What is excess demand?

A

Too much money chasing too few goods

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8
Q

What is cost push inflation?

A

Occurs when costs of production are increasing

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9
Q

What are the causes of cost push inflation?

A
  • external shocks (eg wage price spiral)
  • depreciation in exchange rate
  • Acceleration in wages
  • higher indirect taxes
  • rising labor costs
  • wage price spiral
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10
Q

What leads to an inward shift in the SRAS curve?

A
  • firms raise prices to product their profit margins
  • wages often follow prices
  • A rise in inflation can leach to rising inflationary expectations
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11
Q

What are 2 evaluative statements for AD rising?

A
  • Depends on the size of exchange rate depreciation
  • depends on the PED for imports
  • Uk jobs will be created
  • may not matter if Uk is below inflation target
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12
Q

What is productivity?

A

The rate of output per worker per day
It measures the efficiency of factors of production in the production process

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13
Q

What does higher productivity do?

A
  • Produce goods and services at a lower cost per unit
  • Increase total output from our scarce factor resources
  • helps to bring about economic growth for a country in the long term
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14
Q

What factors explain the productivity gap?

A
  • Relatively low rates of capital investment
  • low rates of spending and research and development
  • not investing enough in skills of labour force
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15
Q

What is the wealth effect (house prices)?

A

Os assets that people own go up in value eg. Houses that person her access to additional borrowing that increases spending and increases AD and PL

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16
Q

What is fishers equation of exchange?

A

MV=PT

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17
Q

what doe MV=PT stand for?

A

M - money supply
V - velocity of circulation
P - average prices
T - number of transactions

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18
Q

What does MV=PT show?

A

GDP

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19
Q

What are some drawbacks of MV=PT?

A
  • V and T are not constant in the UK due to supply side policies
  • difficult to measure T as some are illegal (hidden economy)
  • M also difficult to define
20
Q

why are printing more money and borrowing not inevitable?

A

you can:
- sell govt assets
- use surplus from previous years

21
Q

What is narrow money?

A

measure of value of coins and notes in circulation and other money equivalents that are easily convertible into cash such as short term deposits in the banking system

22
Q

What is broad money?

A

broad money is a measure of the total amount of money held by households by companies in the economy (mainly commercial bank deposits)

23
Q

What are some causes of inflation?

A
  • increasing money supply
  • govt spending (budget deficit)
24
Q

how is govt spending a cause of inflation?

A

By spending on the demand side of the economy focusing on increasing AD - supply not increasing at the same rate therefore there is excess demand driving prices up

25
Q

what is transitionary income?

A

working over time (extra income)
high earners have a higher rate of transitionary income and tend to save most of it (higher MPS, lower savings ratio)

26
Q

what is the marginal propensity to save?

A

how much of our transitionary income we save

27
Q

Why do we not want inflation?

A
  • menu costs
  • fixed incomes lose purchasing power
  • uncertainty
  • savings are eroded
  • possibility of wage spiral
  • loss of international competitiveness
  • breakdown of the price mechanism
28
Q

What does uncertainty depend on?

A
  • how much of our raw materials are domestic/foreign
  • may matter less for products with an inelastic demand, as increased costs can be passed onto price
  • how much of our raw materials are bought in advance on a contracted basis
  • how much stock the business holds for the future
29
Q

What does savings being eroded depend on?

A
  • interest rates relative to inflation
  • made worse if there is disincentive to save and AD increases further
  • less money in banks available for investment
30
Q

What does people losing purchasing power depend on?

A
  • amount of people on fixed incomes (index linked CPI)
  • may act as an incentive to take up work to reducing unemployment
31
Q

What does the possibility of a wage price spiral depend on?

A
  • trade union power
  • skill of workforce
32
Q

What does loss of international competitiveness depend on?

A
  • economy’s reliance on exports
  • prices inflation of other countries
  • price elasticity of exports
33
Q

What is trade union power?

A

Extent to which trade unions can get what they want

34
Q

Why is cost push inflation worse than demand pull?

A
  • ad is easier to influence than sras
  • AS is less elastic
  • cost push leads to job losses
  • may be due to imported costs increasing
35
Q

Why is the inflation target at 2%?

A
  • low, predictable, anticipated inflation provides psychological incentives for firms and individuals
  • individuals see a rise in pay
  • firms see a rise in revenue
  • if the rise for both firms and individuals is both the same, this is money illusion
36
Q

What is money illusion?

A

Worker sees a pay rise by 2%
Simultaneously prices rise by 2%
Workers focus on the 2% pay rise rather than the PL rising and will continue spending

37
Q

What is deflation?

A

Fall in the average price level from one year to the next
Bad is AD falls and good if SRAS rises

38
Q

Why is it good if SRAS falls to cause deflation?

A

Creates an extension in AD which increases employment (benign deflation)

39
Q

Why is bad if AD falls to cause deflation?

A

Increases unemployment (malignant deflation)

40
Q

what is disinflation?

A

prices are still rising but at a slower rate

41
Q

what is government spending split up into?

A

capital and current

42
Q

what is capital spending?

A

spending that will benefit the economy for years in the future e.g. hospital (infrastructure) LR assets

43
Q

what is current spending?

A

spending that will bene fit only in the current financial period e.g. pay the nurse, funded by taxation - SR asset

44
Q

what is the matching concept?

A

matching the benefit of the asset against the cost of that asset

45
Q

what is net investement?

A

net investment is the investment after the depreciation of the asset is removed from the total investment
e.g. capital accumulation(100bn) - depreciation(35bn)=net investment

MR CUMMISKY ECONOMICS (11 decks)

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