Inflation Flashcards
What is inflation?
An increase in currency supply relative to the number to the people using it, resulting in a rise of goods and services over time
How is inflation measured?
By tracking the prices of the set amount of commonly purchased items (market basket)
What does inflation do?
Decreases the purchasing power of money
What is hyperinflation? + example
An extremely rapid period of inflation, using caused by a rapid increase in the money supply
- e.g Weimar Republic (1920s)
What is stagflation? + example
An inflationary period accompanied by rising unemployment and lack of growth in consumer demand and business activity
- e.g. America in 1970s
What are the two causes on inflation?
- demand pull
- cost push
What is demand pull inflation?
When price levels rise because the aggregate demand outweighs the aggregate supply
What is cost push inflation?
General price levels rise due to increases in the cost of wages and raw materials
What are the impacts of inflation on wage rates?
If increases in inflation are greater than increase in wages, a person’s real income has actually decreased
What is the impact of inflation on fixed incomes?
Standard of living may fall because their money cannot purchase as much as it used to
What are the impacts of inflation on business profits?
During times of high inflation, the RBA may raise interest rates, which means that businesses are less likely to expand because of cost of borrowing
What are the impacts of inflation on savers and investors?
High inflation makes it difficult to maintain financial security
What is deflation?
A decrease in the general price level of goods and services
What are the impacts of deflation? (3)
- falling prices discourage spending as people expect that prices might fall in future
- GDP decreases
- unemployment increases
Which part of the business cycle is deflation most associated with?
Severe recessions are often associated with deflation
