Inflation Flashcards
Outline CPI
1) choose a base year
2) pick a basket of 650-700 goods
3) survey 60,000 households
4) weight each good in terms of importance
5) readings from supermarkets to find out how prices have changed
What’s a problem using CPI
No account of quantity and quality of goods
Out of date readings
How is demand pull inflation caused
Increasing ad or when ad is bigger than as
What’s the cause of cost push inflation
Increased costs of production
Increased as (SRAS)
What are the costs of inflation
Decreased value of money so there is less consumption (due to low consumer confidence) and less AD growth
Less value lowers incentive to save as inflation is greater than interest rate
Fiscal drag as people get pulled into higher tax bands as they are not changed in line with inflation
Menu costs of reprinting
Shoe leather costs of searching for lower costs
Wage/ price spiral whereby inflation causes inflation as workers demand higher wages which means firms increase prices to fund so higher wages demanded etc
What are the two benefits of inflation
Increased output if demand pull meaning unemployment falls
Firms can reduce real wages whilst offering wage rises
How do you evaluate inflation in terms of cause
Demand pull is better as it leads to growth so unemployment falls
How do you evaluate inflation in terms of competitiveness
Lower inflation leads to a balance of payments surplus
How do you evaluate inflation in terms of stability
Greater stability means you can plan ahead
What are the benefits of deflation
Decreased COP, Increased purchasing power, Increased consumption, Economic growth, Less unemployment
What are the costs of deflation
Deflationary spiral,
Less output,
More unemployment,
Decreased AD
How do you fix the problem of Infation
Short term:
Contractionary fiscal and monetary policies
Long term:
Supply side
