Inflation Flashcards
(27 cards)
How does inflation relate to price stability?
We have price stability when the inflation rate is considered acceptable, and is from 2-3%.
What happens during periods of inflation?
- Prices are increased
- More money is being spent
- The value of money decreases
How are people’s standards of living affected during inflation?
For people to maintain a similar standard of living during inflation, wages and salaries must also increase at the same rate.
What causes inflation?
- Scarcity (a shortage of supply)
- High consumer demand for particular products
What is demand pull inflation?
Demand pull inflation is when there are not enough goods and services to meet the demand.
What is cost push inflation?
Cost push inflation is when the cost of producing goods is increasing.
What factors can influence economic activity?
- Business and consumer confidence (those that are confident will spend more, those that aren’t confident will spend less)
What is deflation?
Deflation is a general decrease in the prices of most goods and services.
What causes deflation?
Deflation can be caused by:
- A recession, where economic growth declines, fewer goods and services are produced, and consumer demand is lower.
- High interest rates
Deflationary spiral
Falling demand ⤵️
⬇️
Falling prices ⬆️
⬇️
Debt default ⬆️
⬇️
Bankruptcies ⬆️
⬇️
Layoffs and wage ⤴️
reductionsWhat is hyperinflation?
Hyperinflation is an extreme situation where prices rise very quickly.
Who benefits from inflation?
People that benefit from hyperinflation:
- Those with a high income
- Those who can afford expenses
- Producers who can make a profit
Inflation
Inflation is when the prices of most goods and services increase over a period of time.
Who is negatively impacted by inflation?
- unemployed people (living on a fixed income, must spend bulk of which on necessities)
- university students (also living on fixed income, and job opportunities depend on the health of the economy)
Why are low levels of inflation good for the economy?
- Stimulates the economy
- Increases economic activity
What are government policies that affect inflation?
Budgetary policy: when the govt. cuts taxes, consumers have more disposable income to spend
Monetary policy: reducing the interest rate encourages people to borrow and not save. This can cause prices to rise
What could a government do during deflation?
During deflation, the govt. could cut taxes or reduce interest rates. This increases economic activity.
What could the government do during periods of (either high or hyper) inflation.
The govt. could raise interest rates. This decreases the economic activity.
How often does the ABS calculate the inflation rate, and how do they do so?
The inflation rate is calculated every quarter (every 3 months) by using the Consumer Price Index (CPI). The CPI measures the average change is the retail price of a basket of goods.
What is weighting?
Items in the basket of goods are weighted in relation to their importance, and how much the typical family spends on them. These weightings are revised every 5 years
What makes a country miserable?
- high inflation
- war (that can interrupt supply of goods or trading)
- high unemployment
- deflation
+s and -s to Greece keeping the euro
\+ it's easier to trade \+ consumer confidence remains - rest of Eurozone will remain hostile to Greece - debt will increase - austerity measures will remain
What are the 5 task word tips?
- Analyse: provide good level of detail when describing issue, consider various perspectives
- Outline: briefly use key terms to explain a concept
- Describe: use key terms to describe a concept in moderate detail
- Discuss: outline both positives and negatives
- Evaluate: outline both strengths and weaknesses
What is the basket of goods, and what might be in it?
The basket of goods is measured by the Consumer Price Index (CPI). Some categories in the basket are:
- food
- transport
- health
- education
These would be included because they are necessary to maintain living standards.
