inflation Flashcards
describe demand pull inflation
- when AD shifts rights therefore more pressure on existing FOP to increase output from Y1 to Y2
= FOP become scarce resource= increase price for labour, capital and land etc
= increase COP= pass onto consumers via higher price of goods
= causes demand pull pressure and high prices
reasons for AD to increase
- low IRs= cheaper for consumers to borrow £ to spend and cheaper for firms to borrow £ and invest
= increase consumption and investment - decrease income tax= higher disposable income to spend on goods= more consumption
- lower cooperation tax= higher retained profits= can re-invest into capital etc
- higher gov spending= subsidies etc decrease COP= decrease price
describe cost-push inflation
- when SRAS shifts inwards= decrease COP which is passed onto consumers via higher prices
causes of inwards SRAS shift
- higher cost of raw materials
- higher costs of wages
- higher costs of business taxes like VAT
describe fishers equation
M= money supply
V= velocity of circulation= number of transactions w a given amount of money in a year
P= average price level
Q= quantity of goods and services= RGDP
MV=PQ
= expenditure is equal to value of what’s sold in the economy
disadv of high inflation
- decrease purchasing power for households assuming incomes aren’t increasing w inflation
= consumers are worse off= harder to afford and buy basic necessity goods
= lead to higher poverty and deprivation - erodes savings as IRs may not rise in line with inflation
= IR received on savings will be less than inflation rate= savings lose value= bad for ppl who rely on savings e.g. pensioners - erodes export competitiveness
= if inflation increases in UK and not China, UK exports are less internationally comp
= less AD for exports= worsen CA position= harm economic growth= especially bad for countries who are reliant on exports - high inflation means workers can bargain high wages to keep up with high cost of living
= high COP for firms= even higher prices - when inflation anticipation is high, the rational thing for consumers to do is buy goods before processing massively rise
= protect risk of high process= will increase AD and consumption= worsen demand pull inflation= inflationary spiral
adv of inflation
- workers can bargain for higher wages
= increase motivation and morale of workers
= higher productivity - low and stable inflation means consumption happens naturally= won’t delay spending etc= buy goods only when they need to= no excess demand etc
- firms encouraged to increase output if inflation is low and stable
= know they can increase prices to earn high revenue - low real value of debt= workers can bargain higher wages= leads to higher prices= more profit for firms= easier to service debt
- higher wages lead to higher tax brackets= more tax revenue to improve gov finances
- taxes based on expenditure and nominal values like VAT= higher tax revenue collected due to higher prices
evaluation on effects of tax
- depends on tax rate of inflation
= low and stable inflation isn’t as bad - depends on cause of inflation
= demand pull= higher growth and unemployment= easier to solve through contractionary policies
cost push= low growth and high unemployment leads to stagflationary concerns - depends on duration
= long term creates hyper-inflation concerns - anticipated inflation is worse
= risks of inflationary spirals - depends on stability of rate of inflation
= high volatile= risk of inflationary noise
= harm consumption and investment in economy
define deflation
persistent fall in price in an economy in a year
= occurs when inflation rate is negative
describe demand-side deflation
- when AD shifts left= creates large negative output gap= insufficient demand for prices to stay where they are
= high levels of spare capacity e.g. Greece
effects of anticipated deflation
- caused delayed spending as ppl will wait for prices to decrease even more in future
= low consumption= low AD= firms must decrease prices even more= worsen deflation
= decrease growth and unemployment - real IRs will always be positive
= savings gain value if prices in economy decreases= purchasing power and value of money increases= incentivise more savings to decrease AD
= worsen deflation and growth - real value of debt will decrease prices because a decrease in profits and wages makes it harder to service debt e.g. pay back mortgages on a low income
= value of debt doesn’t decrease in line with wages
= less incentive to borrow= low AD due to low consumption and investment
describe supply side deflation
- outwards SRAS shift= caused by higher productivity of labour and capital
= lower unit cost of production - not as bad as growth increased from Y1 to Y2 due to more products and low CO etc
- more likely to occur in short-term= caused by low price of raw materials etc= not guaranteed to stay in LR
evaluation of effects of deflation
- depends on duration
= short term= adv of low prices for consumers= can increase SOL and increase purchasing power
= firms can buy inputs @ lower price= lower COP and widen profit margins
consequences in deflation
- consumption will be delayed
= consumers anticipate low future prices
= decrease C= lower AD= slow down in economic growth - real value of debt increases w deflation
= debt real value is more than wage in future
= harder to pay-off= drag on consumer confidence - low prices= lower profit margins
= decrease revenue= higher unemployment or wage cuts etc to decrease COP
= lower SOL
external causes of inflation
factors that originate outside the economy and affect overall level of prices
- if price of imports increase= high cost of raw materials= high COP increases price
- higher price of goods that require those inputs of commodity goods e.g. oil
- decrease value of exchange rate relative to other countries currencies
= make imports more expensive= increase price
describe stagflation
refers to combination of slow economic growth, high unemployment and high inflation
= shown on SR Phillips curve outwards shift when SRAS shift inwards due to cost push inflation for producers due to high costs of raw materials etc
- prices rise quicker than economic growth
= decrease SOL
- fixed by fiscal, monetary and SS policies
