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Economics (Macro) > Inflation > Flashcards

Inflation Flashcards

1
Q

What 3 things does monetary policy concern

A

Interest rates
Money Supply
Exchange rates

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2
Q

What are interest rates

A

The cost of borrowing or the reward for borrowing

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3
Q

Give one example of expansionary monetary policy

A

A decrease in interest rate

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4
Q

Apart from the ratio of spending/saving, what other effect does rising interest rates have on consumers

A

Decreased confidence

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5
Q

What are the two types of inflation

A

Cost push
Demand Pull

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6
Q

Draw the diagram for cost push inflation

A

In notes

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7
Q

Draw the diagram for demand pull inflation

A

In notes

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8
Q

Why is demand pull sometimes considered as ‘good inflation’

A

It is accompanied by GDP growth

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9
Q

Give 4 causes of demand pull inflation

A

Higher incomes
Lower interest rates
Lower income tax
Increase in government spending

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10
Q

Why is cost push seen as ‘bad inflation’

A

It is accompanied by a fall in GDP

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11
Q

What are 4 causes of cost push inflation

A

Increase in wages (min wage)
Rise in production costs
Rise in corporation tax
Rise in global commodity prices

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12
Q

What is inflation

A

Inflation is the increase in the average price level over time

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13
Q

How is inflation calculated

A

Calculated by the ONS - they look at goods and services bought by the average family in a metaphorical basket of goods

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14
Q

In the CPI measure, how are categories in the basket weighted

A

Each category is weighted according to the proportion of income spent on each category by the average family

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15
Q

How can we alter the the CPI measure to be more accurate for a specific group of consumers

A

By varying the weightings of the basket of goods, or by altering the categories all together

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16
Q

What is index linking

A

Moving anything in line with inflation

17
Q

Why might we want a CPI measure for for pensioners or students

A

May use it to move state pension/ student loan in line with inflation

18
Q

Give 7 costs of inflation

A
  • Hinders economic growth
  • Creates uncertainty
  • Decreases international competitiveness
  • Less disposable income for consumers
  • Erodes the value of savings
  • Menu/shoe leather costs
  • Allocation process in a free market is less efficient (decrease in allocative efficiency)
19
Q

What is the effect of inflation creating uncertainty

A

Erodes business confidence and decreases investment

20
Q

How does inflation reduce growth (2 ways)

A
  • Reduces the spending power of consumers which reduces AD
  • Contractionary monetary policy in response to inflation (rise in interest rates) leads to less AD
21
Q

Explain the impact of inflation affecting international competitiveness

A

UK exports are more expensive relative to other countries

22
Q

How may inflation make the distribution of income more uneven

A

High income earning private sector workers are more likely to receive above inflation pay rises than the public sector

23
Q

Apart from public sector workers, which group is likely to see real incomes fall due to inflation

A

Those on relatively fixed incomes (Pensioners/benefits)

24
Q

Explain how inflation erodes the value of savings

A

If interest rate on a savings account keep up with the inflation rate, this can be prevented. However, REAL INTEREST RATES tend to be negative

25
Q

What is a real interest rate

A

I/R - inflation rate

26
Q

What is a menu cost

A

Metaphor for the time and effort required to update prices

27
Q

Give an example of a menu cost

A

Changing packaging on something that says 25p when increasing the price

28
Q

What is a shoe leather cost

A

The time and effort required to check that updated prices (due to inflation) are still the best deals (from suppliers and for consumers)

29
Q

How does inflation lead to a decrease in allocative efficiency

A

Due to the signalling function of price no longer working as effectively

30
Q

What is fiscal drag

A
  • Incomes may rise, yet getting placed in a higher tax band means a greater proportion of income is taxed
31
Q

Explain fiscal drag

A
  • A rise in nominal incomes leads to a greater proportion of that income being taken in tax-because we have a progressive, banded system
  • This means net income is reduced because a greater proportion is lost in tax
32
Q

How may fiscal drag benefit the government

A

Fiscal drag means a greater proportion of income is lost in tax, leading to an increase in revenue for the government

33
Q
A
34
Q

Why does the government not give above inflation pay rises to public sector workers during inflation

A

As a means to tackle inflation, if they raise their wages, this increases AD and therefore worsens inflation

Economics (Macro) (10 decks)

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