Inflation Flashcards
What is inflation
When there is a sustained increase in the general price level
What are the 2 types of inflation
Demand Pull inflation
Cost push inflation
Describe demand pull inflation
-When an increase in aggregate demand pushes up the price level,leading to inflation
Describe cost push inflation
-When an increase in costs reduces supply,shifting SRAS inwards,pushing up the price level,leading to inflation
What is deflation
When there is a sustained decrease in the general price level (negative inflation rate)
Describe the deflationary spiral
When there is deflation,consumers would delay purchases waiting for prices to decrease further
This meant that consumers saved more and spent less,decreasing consumption,shifting in AD and decreasing the general price level
A decrease in consumption meant that firms had to lay off more workers,increasing unemployment and decreasing real GDP,decreasing actual economic growth
This would continue more and more
What are the 2 causes of deflation
-A decrease in AD
-An increase in AS
How do we calculate inflation rate
(change in price level/original price level)x100
How do we calculate the price level (3 stages)
1.Household survey
The office of national statistics’ (ONS) living costs and food survey interview 7000 households to find the 650 most common goods and services and to find the percentage of spending on each of those goods and services
2.the ONS conducts a price survey where they collect prices of these 650 goods across the UK in order to find the average price of each good
3.A weighted average of all the prices is calculated in order to find the price level
(percentage of spending as a decimal x price of good/service),then add up totals
How do we calculate the consumer price index
1.Set base year to a CPI of 100
2.((Current price level/price level in base (starting) year)x100) + index from base year
What is disinflation
When the inflation rate is positive but is decreasing
-the price level is increasing at a decreasing rate
