Inflation Flashcards
Inflation
A persistent or continuing rise in the average price level
Deflation
Continuing tendency for average price level to fall
Disinflation
Is slowing down in the rate of inflation, e.g. from 3% to 2%
What are the two basic causes of inflation?
Excess aggregate demand in the economy
A general rise in costs of production
Demand-pull inflation (a.k.a. demand inflation)
A rising price level caused by an increase in aggregate demand shown by a shift of the A.D. curve to the right
cost-push inflation (a.k.a. cost inflation)
A rising price level caused by an increased in cost of production shown by a shift of the SRAS curve to the left
The consequences inflation for performance of the economy and for individuals
Inflation can impose serious costs on both the economy and individuals, and the seriousness of these cost depends on whether individual successfully anticipate the inflation rate
Relatively low inflation
When inflation is relatively low with little variation from immune to, it is quite easy to anticipate next years inflation rate.
Creeping inflation, which is also associated with growing markets, healthy profits, and a general climate of business optimism
Eden, this way, low inflation, maybe a necessary side-effects or cost of expansionary policies to reduce unemployment
Some of the disadvantages of inflation
-Distributional effects
Weaker social groups and society living on fixed incomes lose all those in a strong bargaining position gain
Also, with rapid inflation, real rates of chest may be negative
In the situation, lenders are really paying borrowers for the doubtful privilege of lending to them, and the inflation accesses are hidden tax, re-distributing income and wealth from lenders to borrows
Some of the disadvantages of inflation
-Distortion of normal economic behaviour (inflationary noise)
Inflation can distort consumer behaviour by causing household to bring forward purchases and hoard goods if they expect the rate of inflation to accelerate
Similarly, firms may divert funds out of productive investment in fixed investment projects into unproductive, commodity, hoarding and speculation
Is it because when changes in relative prices is confused with a change in the general price level or inflation
Some of the disadvantages of inflation
-Breakdown in the functions of money
In inflation, money becomes less useful and efficient as a medium of exchange and store or value
In the most extreme form, inflation, a hyper inflation, in which the rate of inflation accelerates to a minimum of several hundred percent a year, less efficient, water, replaces, money and imposes extra costs on most transactions
Some of the disadvantages of inflation
-Reduced international uncompetitiveness
When inflation is higher than in competitive countries exports increase in price, putting pressure on a fixed exchange rate
Lower growth and rising unemployment are likely to result with a floating exchange rate the exchange rate falls to restore competitiveness, but rising import prices may fuel a further bout of inflation
The consequences of deflation
Deflation or a falling price level. Must be good for both of you performance of an economy and for individuals.
Extended price deflation
When people believe prices are going to fall, they postpone big ticket consumption decisions, for example, replacing their cars
This may erode business confidence and trigger a recession or deepen and lengthen and already existing recession
However, this assumes that falling prices are result of malign deflation rather than benign deflation
Monetary policy
The use by the government and its agents, the Bank of England of interest rates and other monetary instruments to try and treat the governments policy objectives
