Inflation Flashcards
define demand pull inflation
occurs when there is excess AD when there’s a positive output gap, businesses respond to high demand by raising prices to increase profit margins
what phase of the cycle is demand pull associated with
boom phase when sras is inelastic
causes of demand pull inflation
- very fast growth of demand for credit/ borrowing
- depreciation of exchange rate increases price of imports and reduces foreign price of Uk exports
- reduction in direct/indirect taxation consumers have more disposable income
- rapid growth of money supply as a consequence of increased bank and building society borrowing
- rising consumer confidence and increase in rate of growth of house prices
- faster rates of economic growth in other countries providing boost to Uk exports overseas
define cost push inflation
occurs when costs of production are increasing
causes of cost push inflation
- external shocks
- depreciation in exchange rate
- deceleration in wages
- leads to inward shifts sras curve: firms raise prices to maintain profit margins, better able to do when market demand is inelastic
- a rise in inflation leads to rising inflationary expectations
define wage price spiral
workers demand higher wages to maintain living standards
why we don’t want high inflation
the loss of international competitiveness
why we don’t want high inflation, people of fixed incomes lose out
people on benefits have no control over them
why we don’t want high inflation, businesses find it difficult to plan
cannot predict cost of raw materials not be able to predict what to charge, lead to investment decisions being delayed and foreign firms refusing to come to britain
why we don’t want high inflation, lenders lose out
if we save money in bank account during inflation our money will buy fewer things when withdrawn
whats the pensioners triple lock
guaranteed that it will rise each years by 3 measure:
- current rate of CPI inflation
- average wage growth
- 2.5%
