Inflation Flashcards
what is cost push inflation?
inflation which is caused by the rising costs of inputs to production- higher costs for businesses mean they put prices up to compensate for this (fixed or variable costs)
what does rising costs of inputs to production cause?
causes the cost for consumers to increase, as businesses want to continue making the same profits as they did before inflation.
which way does the aggregate supply curve shift when cost push inflation occurs?
to the left to form AS1
example of cost push inflation?
a rise in cost of imported raw materials:
- if world prices rise then producers will pay higher costs and set higher prices. this is how prices increase in world commodity markets and can lead to high domestic inflation
Increase in wages means that fixed costs are increasing and prices have to be put up for consumers to make up for this.
how is demand pull inflation caused?
excessive growth in aggregate demand compared to supply- Due to a boom in the economy
- due to excess money being available in the economy— TOO MUCH MONEY CHASING TOO FEW GOODS
where does the aggregate demand curve shift when demand pull inflation occurs and what does it allow the seller to do?
aggregate demand curve will shift to the right to form AD1 - this allows seller to raise prices
2 causes of demand pull inflation?
1) high consumer spending or high demand for exports - high consumer spending caused by high consumer confidence
2) money supply growing faster than output - amount of money not matched by the output of goods and services which can ultimately lead to higher prices e.g when interest rates are low, consumers spend more
what are the costs and consequences of inflation? ( give 2 examples)
1) inflation can cause the standard of living for those who have fixed incomes to FALL. Biggest impact will be on those in low income unemployment or on welfare benefits.
2) inflation will also create uncertainty for firms as rising costs will reduce investment
what are the costs and consequences of inflation? ( give 2 examples)
1) inflation can cause the standard of living for those who have fixed incomes to FALL. Biggest impact will be on those in low income unemployment or on welfare benefits.
2) inflation will also create uncertainty for firms as rising costs will reduce investment
3) Reduced global competitiveness as our exports are more expensive to buy for other countries.
4) less incentive to save, so less money available for borrowing and investing.
5) Inflation reduces the incentive to save and means more household spending. This will breed further inflation in the form of demand pull inflation as more money is being spent but with production of goods not rising.
What is disinflation??
where the inflation rate is positive but it is falling e.g. 2012 rate= 3%
2013 rate =2%
2014 rate = 1%
What does CPI stand for and what is its definition?
Consumer Price Index
Defined as: CPI is a measure of changes in then price of representative basket of consumer goods and services
What are the two most common ways of measuring inflation?
using RPI and CPI
What does RPIX exclude?
excludes mortgage interest repayments
what is RPIY?
RPIY is RPIX minus indirect taxes
What are the difficulties in measuring inflation?
- CPI/RPI dont tell us if price increases represent improvement in quality
- only measure a fixed basket of goods for a year(something that’s representative at the start of they year may not be at then end of the year)
- CPI/RPI do not take into account price variations
