Inflation Flashcards
How is inflation calculated
The percentage quarterly rate of change in CPI
What is cost push inflation
When inflation occurs due to increased costs faced by firms
Demand pull inflation
Inflation occurred by an increase in aggregate demand
What is money stock?
The amount of money in the economy
Is demand pull and cost push inflation sustained?
No NORMALLY it’s a one off increase in the price level
What causes persistent inflation?
When the money stock grows more rapidly than real output
What is the fault that the CPI and RPI both share?
They both don’t take into account the substitution effect
What is the substitution effect?
The indexes are based off fixed weights and may not take into account of consumers buy a substitute due to a rise in price
How do some indexes combat the substitution effect?
The weights of the goods change annually
Also new goods are included in 2014
14 new goods were incorporated in the CPI including fresh fruit snacking pots
To show changes in patterns of consumer spending
What are the costs of very high inflation ?
Firms have to keep adjusting their price lists which raises the cost of undertaking transactions - menu costs
Discourages people from spending as inflation means the value of money is falling so they try to hold their money in interest bearing accounts -shoe leather costs
What are the costs of inflation? ( not necessarily hyperinflation)
When inflation is volatile this causes uncertainty meaning firms can’t predict the rate of change in prices which may prevent them from investing which would expand the countries productive capacity
Inflation means that it is harder to uses prices to guide resource allocation as it is hard to use prices as a signal of what consumers want to consume when the price level is increasing
This means that wastage of resources is more likely (market failure although micro)
‘Deflation is the same as negative inflation’
TRUE or FALSE
True
What is deflation?
A fall in the average price levels- negative inflation
What is a cost of inflation ?
People may post pone buying goods as they believe it’s price will fall in the future
This means there’s a fall in AD which leads to a further decrease in the price level
Evaluate the cost of deflation (in terms of postponing buying)
The fall in AD will not always cause a fall in the price level - it depends on where AD is on the LRAS
If a large bulk of consumer expenditure are on goods that are seen as necessities people are less likely to postpone spending
