Inflation Flashcards
Define inflation
Inflation is the persistent and appreciable rise in the general level of prices over time.
- If the rate is higher than 3% it is not ideal
- 100 000 goods and services are measured every 3 months
- people have less purchasing power
- prices go up
What is the inflation equation?
CPI (present) - CPI (previous) / CPI (previous) x 100
What are the 2 types of Inflation?
Demand Pull Inflation and Cost pull Inflation
What is Demand Pull Inflation?
Demand Pull Inflation is best remembered by the saying “too much money chasing few too goods”.
It generally occurs in a boom when there is a high level of demand in the economy.
What are the two causes of demand pull inflation?
1) A high level of consumer spending on goods and services creates shortages D>S, resulting in higher prices.
2) There is a Strong demand for workers, this forces up wages therefore demand for goods and services rises resulting in higher prices.
Give an example of demand pull inflation
Australia experiences a strong period of economic activity (boom). Consumer spending increases resulting in higher demand for non-essential items. As a result, the price of goods and services increased.
What is cost pull inflation?
This occurs when rising production costs are passed onto consumers in the form of higher prices. The price of one or all of the factors of production (resources) may have changed.
Give an example of Cost pull inflation.
An increase in oil prices occurs following America’s invasion of Iran (the world’s second largest oil producer) this raises production costs for a number of companies as petrol prices rise.
What are 2 economic effects of inflation?
Price rises reduces purchasing power
Capital for Labour Substitution
Describe what happens when price reduces purchasing power
If price rises faster than income, households are unable to purchase as many goods and services
Describe what happens when Capital is used as a substitute for labour
When wages rise faster because of inflation, labour ‘prices itself out of a job’. Employers may replace workers with machines who don’t ask for pay rises.
Who are the winners of inflation?
Rich people
Borrowers
Who are losers of inflation?
Workers and welfare recipients
Savers
Lenders
How are workers and welfare recipients losers?
Low income earners and people on welfare can buy less due to the increase in prices, they will have less purchasing power
How are lenders losers and borrowers winners?
Borrowers as winners as the money they borrow will worth less than before, due to inflation
Lenders are the losers as they are getting the money back that will worth less, due to inflation.
