Inflation Flashcards
Three key causes of inflation
- Cost-push inflation, driven by rising production costs.
- Demand-pull inflation, caused by consumer demand exceeding supply.
- Government printing money, which, if not managed carefully, can devalue
What is Creeping inflation
- The rate of inflation doesn’t exceed the rate of production growth, creeping inflation is < 10%
What is Galloping inflation
- The rate of inflation exceeds the rate of production growth, Galloping inflation is from 10% to 100%. Money loose purchase power, people hold as little money as possible.
What is Hyperinflation
When prices exceed over 100% per year. Prices as well as wages are extremely erratic. Money have no value and barter trade emerges
Ways to stop inflation
- Managing the wages and prices - determined by state income policy
- Stimulating market competition - e.g. anti monopoly regulations
- Fiscal and monetary policy (Managing the economy)- e.g. central banks can affect inflation to a significant extent through setting interest rates
What is a virtuous cycle?
A virtuous cycle is basically when prices increase, people are more likely to spend more money before prices go even higher to save money on the same item. This causes companies to make more money which gives out more job opportunities
What is a virtuous cycle?
A virtuous cycle is basically when prices increase, people are more likely to spend more money before prices go even higher to save money on the same item. This causes companies to make more money which gives out more job opportunities
Why is deinflation bad?
Because when prices drop people might spend less which can hurt the economy really badly
What are the two types of money and their meanings?
Commodity - is money that has value on its own because it’s made of something valuable like gold
Fiat - Value given by the government
What is barter?
Barter is when you trade goods or services for other goods or services without using money
Functions of money
The functions of money are:
1. Medium of exchange – Used to buy and sell goods or services.
2. Unit of account – Helps measure and compare the value of things.
3. Store of value – Keeps its value over time so it can be saved and used later.
4. Standard of deferred payment – Used to pay debts or make future payments.
History of money
Simple History of Money
1. Barter System – People traded goods and services directly, but it was inconvenient. 9000 BC - 6000 BC
2. Commodity Money – Items like gold, silver, and salt were used because they had value. 3000 BC
3. Metal Coins – Governments started making coins with fixed values to make trade easier. 600 BC
4. Paper Money – Banks and governments introduced paper money as a promise of value. 11th century
5. Fiat Money – Modern money is not backed by gold but has value because the government supports it. 20th century, mainly after the end of gold standard
6. Digital Money – Today, money exists electronically, with credit cards, online banking, and cryptocurrencies. late 20th century
What are wages?
a fixed regular payment earned for work or services, typically paid on a daily or weekly basis.
What is demand?
The desire, willingness and ability to buy a good or service
What are tax rates, types of tax rates
Tax rates are how much people or businesses pay. There are two types, progressive (higher income = higher tax), fixed rates (everybody has the same rate)
What are state and local taxes
State taxes - Taxes collected by the state government (sales taxes, state income taxes)
Local taxes - Taxes collected by cities or towns (property tax, local sales tax)
What does V.A.T mean
VAT (Value-Added Tax) is a tax you pay when you buy goods or services. Businesses add it to the price, collect the money, and give it to the government.
