Inflation Flashcards
What is inflation?
General rise in prices
across an economy
What is deflation?
General decrease in prices across an economy
What is disinflation?
A fall in the rate of inflation
What is the basket of goods?
Contains all consumer goods
and services purchased by households and the prices
measured in every shop or outlet that supplies them.
What is CPI and RPI?
Consumer Price Index, Retail Price Index.
What is a limitation of using the CPI
One limitation of using the CPI is that it can result in substitution bias, this is because the basket of goods assumes that consumers would keep buying the expensive option rather than the cheaper substitution.
What are the types of inflation?
demand pull, cost push, growth of money supply.
What is demand pull inflation?
The excessive demand for goods and services within an economy.
What causes demand pull inflation?
Reduced taxation
Increases disposable income
Lower interest rates
Makes borrowing more attractive and saving less rewarding
A general rise in consumer spending
Perhaps from higher incomes and consumer confidence
Improved availability of credit
Banks/Building Societies widen the availability of credit or make it more affordable
A weak exchange rate
Will boost export growth
Fast growth in other countries
May increase demand for UK exports
General rise in confidence / expectations of future growth
May feed through to higher consumer spending and investment
Certainty
Links to confidence and assists consumers and firms in their spending and investment decisions
How does demand pull inflation effect AD if interest rates are low.
Shift to the right. Borrowing would be more attractive, saving is less rewarding, so consumption will increase.
What is cost push inflation?
When firms respond to a rise in production costs. e.g increasing prices to protect profit margins.
What causes cost push inflation?
Wage increases
For many firms, wages is their largest single cost of production
It is likely that if prices are rising, workers will demand higher wages in order to maintain their ‘real’ incomes
If these higher wage costs are reflected in higher prices, then workers will continue to demand higher wages, leading to a
wage-price spiral
Higher raw material costs
As primary raw materials become more scarce and in even greater demand, raw materials and associated components may rise
in price
Higher taxes
The government may impose higher taxes on firms; for example, corporation tax, national insurance or taxes on waste disposal
Higher import prices
A weaker exchange rate or rising prices abroad mean that imported components feed through to higher costs of production
Natural disasters
May temporarily or permanently reduce the supply of raw materials or disrupt the supply chain, adding to a firms costs
How do you measure inflation?
Percentage change.
What is the CPI?
Measure of the average change over time in the prices paid by e.g U.S. consumers for a market basket of consumer goods and services.
