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MACRO ECONOMICS > INFLATION > Flashcards

INFLATION Flashcards

1
Q

What is inflation ?

A

The sustained increase in the price level of goods and services leading to a fall in the purchasing power of money

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2
Q

What are some limitations of the CPI ?

A

Spending habits alter between households

Price may change due to a change in the quality of a good

CPI is slow to respond to new products

Average annual figure is never the actual figure experienced

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3
Q

What are the main causes of inflation ?

A

Demand pull factors
Cost push factors
Administered prices

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4
Q

Factors that affect demand pull inflation ?

A

Lowered I rates increase consumption

Decreased taxes increases disposable income

Increases in GOVT spending

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5
Q

Factors that affect cost push inflation ?

A

Increased price of raw materials
Increase in wages
Increased business taxes
Weaker exchange rate

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6
Q

Name some internal causes of inflation

A

Large surges in property prices

Higher wage / labour costs

Increases in taxes / credit

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7
Q

Name some external factors affecting inflation

A

Changes in the price of oil and gas

Depreciation of exchange rates

Changes in the price of commodities

Inflation in other countries

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8
Q

What is demand pull inflation ?

A

When AD grows at an unsustainable rate

Producers can raise their prices to receive larger profits

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9
Q

What is cost push inflation ?

A

Occurs when firms respond to rising costs by increasing their prices to protect Profit margins

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10
Q

Why is high inflation an economic problem ?

A

Causes inequality in low income homes
Negative real interest rates ( interest on savings is lower than inflation )
Causes higher cost on loans
Risk of wage inflation ( higher costs and lower profits )
Reduces business competitivness

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11
Q

Who are the winners during a time of inflation ?

A

Workers with higher wage bargaining power

Producers if prices rise faster than inflation

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12
Q

Who are some loser during a time of inflation ?

A

Retired people on fixed incomes

Lenders if real interest rates are -

Savers if real returns are -

Workers in low paying jobs

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13
Q

How can macroeconomic policies affect Inflation

A

Fiscal policy - Less spending on merit goods / welfare / raising taxes

Monetary policy -Higher I rates / less lending / could cause exchange rate to increase

Supply side - To increase productivity , competition and innovation

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14
Q

What is quantitative easing ?

A

When the BoE Buys assets usually Govt Bonds with money that the bank has created electronically

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15
Q

What is deflation ?

A

A persistent fall in the GPL of goods and services . The rate of inflation becomes negative

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16
Q

What is Disinflation ?

A

A fall in the rate of inflation

Still inflation but smaller than last month

17
Q

What are some demand side causes of deflation ?

A

Deep fall in AD causing persistent recession

Large negative output gaps

18
Q

What are some supply side causes of deflation ?

A

Improvement in productivity

Technology advances

Fall in wage rates

High exchange rates causes imports to fall

19
Q

What are some consequences of price Deflation ?

A

People postpone spending if they expect price fall in the future

real value of debts increase - reduces consumer confidence

Real cost of borrowing increases

Falling asset prices reduces confidence and increases saving

20
Q

What are some macro economic policies to avoid price deflation

A

Lower I rates and QE - cheaper loans for businesses and expanding credit supply

Fiscal measures - Higher GOVT spending / rise in GOVT borrowing / lower taxes to increase spending

Other - attempts to lower value of exchange rate , higher taxes on saving to encourage spending

21
Q

What are the costs of high inflation ?

A

Lower purchasing power - workers are less off - affects ability to buy necessities

Erosion of savings , savings lose value - affects those who rely of savings like unemployed , OAP’s and economically inactive

Risk of wage price spiral - causes a rise in costs of production - firms pass on more costs to customers ( cost push inflation )

Fiscal drag - inflation rising and workers are receiving higher income in line with inflation could drag them into higher tax bands meaning they are less off

22
Q

What are the benefits of low and stable inflation ?

A

Workers can bargain for larger wages / improves morale and productivity

Firms encouraged to increase output as they know they can raise their prices and earn more revenues

Reduces the real value of debt - becomes easier to pay off debts if wages rise in line with inflation

Improved state of GOVT finances = fiscal windfall - any nominal values of tax as prices rise they will receive more VAT taxes as prices rise

23
Q

What are some methods to reduce demand pull inflation ?

A

Contractionary monetary policy - Increased I rates to reduce AD

Contractionary fiscal policy - A cut in GOVT spending or increased taxes

24
Q

What is the effect of contractionary monetary and fiscal policy ?

( DEMAND PULL INFLATION )

A

We could see :

Less economic growth
Higher unemployment
Causes recession / less macroeconomic objectives
Higher I rates reduces investment / lower competitiveness
Impacts those who have debts / reducing living standards

25
Q

Why is malignant / demand side deflation bad ?

A

Consumers delay spending which is bad for AD for businesses

AD falls = lower growth and Higher unemployment

Real Interests creates incentives to save rather than spend

Increases the real value of debt ( wages and prices fall as firms are earning less ) making it harder to pay off debt

VERY BAD WHEN ANTICIPATED

26
Q

What is malignant deflation ?

A

Demand side deflation

27
Q

What is benign deflation ?

A

Supply side deflation

28
Q

What do we see during a time of benign deflation ?

A

A reduction of costs of production in the economy
Comes with higher economic growth
Short term and unanticipated / prices fluctuate

29
Q

How does benign deflation affect consumers and businesses

( supply side deflation )

A

Falling prices for consumers and improves living standards and purchasing power

Businesses can buy factor inputs cheaper / increases profit margins

30
Q

Why do Banks use quantitative easing ?

A

Banks purchase securities to reduce interest rates and increase the supply of money and drive more lending to consumers and businesses

31
Q

When do banks use quantitative easing

A

Times of deflation

32
Q
A

MACRO ECONOMICS (2 decks)

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