Inflation Flashcards
Inflation
An on-going rise in the general price level
Deflation
A fall in the general price level
Disinflation
A fall in the rate of inflation
Rate of Inflation
Percentage change in CPI (Consumer Price Index)
Nominal
E.g. Nominal wage or GDP. Actual or face value. Measured in current year dollar
Real
E.g. Real wages or RGDP. Value adjusted for changes in the price level. Measured in constant-year dollars. In the case of real wages = purchasing power of wages.
Investment
Increases in man-made resources
Aggregate Demand
The total demand of all sectors that make up the economy
Aggregate Supply
The total supply of all goods and services in the economy
Cost-Push Inflation
Inflation caused by decreases in AS (Aggregate Supply)
Demand-Pull Inflation
Inflation caused by increases in AD (Aggregate Demand)
Quantity Theory of Money
MV = PQ
Quantity Theory of Money
(M)
Money Supply
Quantity Theory of Money
(V)
Velocity of Circulation (Refers to how many times money changes hands in a year - the number of transactions financed by a single dollar)
Quantity Theory of Money
(P)
Price level
Quantity Theory of Money
(Q)
Level of national output/ output of goods and services
Operating Surplus
(The government) Operating surplus = tax revenue without government spending
Productivity
Output / inputs per unit of time
Disposable Income
The amount of money that a person or family has left after paying their taxes
Discretionary Income
The money left over after a person pays their taxes and for essential goods and services like housing and food
Explain why the consumer price index is a weighted index
Price increases of some goods and services are more important than others. For example, an increase in housing costs will have more impact on the average household than an increase in clothing costs.
What does PAYE mean?
Pay As You Earn : Employees earning a wage or salary are taxed directly from their pay.
Overall Operating Balance
Revenue less expenses, plus net gains and losses. It shows whether the government sector has generated enough revenues to cover its expenses in any given year.
Creeping Inflation
A constant, slow annual increase in the rate of inflation
Hyperinflation
Where the price level rises at a very rapid rate.
What is the CPI designed to do?
It is designed to provide a broad measure of changes in prices, as they affect New Zealand consumers in general.
Household Income
Y
Spending on Goods and Services
C
I
Investment
Government Expenditures
G
Export Receipts
X
Import Payments
M
Savings
S
Aggregate Demand Equation
AD = C + I + G + (X - M)
Explain the impact of a 7.3% inflation rate on the purchasing power of a worker who receives a 4.3% increase in their nominal wages.
The worker will have decreased purchasing power as their real wages have fallen by 3%. They can purchase 3% less goods and services than before.
Explain one reason why high inflation rates may cause income distribution to become more unequal.
People who are on fixed wages /incomes may have no changes to their nominal wages, whereas those on higher incomes may have the ability to negotiate wage increases in line with or exceeding the inflation rate.
Borrowers
Borrowers are better off in times of high inflation as the value of assets they buy increases. Future debt repayments will be paid with dollars of less value.
Savers
Savers are worse of in times of high inflation as the value of their savings falls in real terms. Consumers will also shift towards consumption over savings as they expect prices to rise and the purchasing power of their savings to fall.
