inflation Flashcards
definition of inflation
the sustained rise in the average price level of goods/ services over a period of time
measurments of inflation
consumer price index (geometric mean of a basket of goods)
retail price index
types of inflation
demand-pull (AD shifts to the right)
cost-push (AS shifts to the left)
demand -pull inflation (def, policies, why)
demand in the economy increases prices monetary policy (interest rates and QE) could be caused by a change in demand components, eg consumer confidence
cost-push inflation (def, policies, why)
FOPs increase in price causes fall in SRAS
fiscal policy tackling supply
caused by possible increase in price of exports
deflation
the persistent fall in the average level of prices
disinflation
where the rate of inflation decreases
spiral of inflation
monetarist view, as either AD or SRAS shift, a shift of the other will result because LRAS takes longer to change
costs of inflation
loss of purchasing power (inflation faster than incomes-benefits) discourage saving (vice versa for deflation) commercial interest rates international competitiveness (exports less competitive..) uncertainty labour unrest (if wages not keeping up with inflation)
explain loss of purchasing power
If there is inflation, but have same income=fall in real income;
inflation linked incomes (can be due to strong trade unions), inflation can be higher than expected
how inflation discourages saving
better to spend earlier,
people who want to save will start spending on fixed assets (housing)
how commercial interest rates are affected by inflation
banks want to keep making money, will raise interest rates on borrowing and lower on savings
effect on international competitiveness
exports may decrease as price increases, but imports increase because of lower price
uncertainty because of inflation
discouraged investment because of uncertainty in the economy
types of deflation
good deflation
bad deflation
good deflation
due to improvements in the supply-side of the economy and/or improved productivity; LRAS; results in increased real output and fall in unemployment
bad deflation
from demand-side of the economy
reduced real output and employment
costs of deflation
Udi
unemployment (companies lay off worker as consumers wait for prices to be at lowest(deferred consumption) then confidence decreases)
investment (less profits and lower business confidence reduces investment)
debtors (value of debt rises with deflation)
limitations of cpi
basket made for typical family, not all
(regional difference not included, affect on wages)
data collection errors (all has to be samples)
changes in the contents of baskets according to consumer spending, difficult for analysis
different methods create international inaccuracies
seasonal changes could affect it
does not include prices of fops (commodity price index; could indicate cost-push pressures)
monetarist- excess monetary growth cause
they believe inflation always caused by an excess supply of money in an economy; increases in AD are purely inflationary
reducing inflation evaluated
(higher taxes reducing disposable income and consumption/ lower government spending UNPOPULAR (eg. subsidized theatres in UK))
TIME LAG between need for change and legislation
central bank control DE-POLITICIZES it
fiscal policies have larger time-lapse,
monetarists- SUPPLY regulated to national output
elected governments do not always have LONG-TERM INTEREST at heart
importance of independent central bank
can make politically unpopular decisions; as long as confidence in them, then less expectations of inflation therefore reducing cost-push pressures as they don’t ask for wages to increase
