Inflation Flashcards
What is inflation?
Inflation is a sustained increase in the general price level of goods and services in an economy over time, leading to a decrease in the purchasing power of money
What is deflation?
Deflation is a sustained decrease in the general price level of goods and services in an economy over time, leading to an increase in the purchasing power of money
What is disinflation?
Disinflation is a slowdown in the rate of inflation, meaning prices are still rising but at a slower pace
What is CPI?
Consumer Prices Index is a measure of the average change in prices of a “basket” of goods and services commonly purchased by households
What is inflation measured in?
Increases in the cost of living are measured using an index based on a weighted basket of goods and services
What is the formula for CPI?
CPI = (Cost of nominal basket in year///Cost of basket in base year)***100
What are the limitations of CPI?
Exclusion of certain costs
Unrepresentative of all households
Time lag
Substitution Bias
What is the alternative measure of inflation?
Retain Price Index (RPI) gives a higher inflation rate as it includes housing costs
What are the causes of inflation?
Demand-Pull Inflation
Cost-Push Inflation
Growth of the Money Supply
What is demand-pull inflation?
Aggregate demand exceeds aggregate supply so pulls up the price
What is cost-push inflation?
Results from rising production costs that lead businesses to increase prices
What is the growth of money supply?
When central bank prints excessive money or inject too much into the economy, it can erode the value of the currency, causing higher prices
What are the effects of inflation on consumers?
Reduced purchasing power
Encourages immediate spending as savings lose value
What are the effects of inflation on firms?
Increased costs reduce profitability
Creates uncertainty, discouraging investment
What are the effects of inflation for the government?
Higher tax revenues
Increased pressure to adjust benefits, wages, and public spending
