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Economics - Macro > Inflation > Flashcards

Inflation Flashcards

1
Q

Define Inflation.

A
  • Is a sustained rise in the cost of living and average price level.
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2
Q

What 2 Factors directly cause inflation?

A
  • Demand Pull (Rising AD) - Cost Push (SRAS shift left) - High inflation expectations
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3
Q

What causes Demand Pull Inflation?

A
  • Interest rate cut - Rising Wages - Increased confidence - Increased money supply
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4
Q

What causes Cost Push inflation?

A
  • Rising Oil Prices - Rising Wages - Higher Taxes - Devaluation (rising import prices)
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5
Q

How does inflation affect the value of money?

A

Leads to a decline in the value of money

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6
Q

What is the inflation rate?

A

Is the annual percentage change in price level

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7
Q

How is inflation measured?

A

Through government statistics such as: - RPI (Retails Price Index) - CPI (Consumer Price Index)

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8
Q

Define Deflation.

A
  • Is a fall in the price level of the economy. It means there will be a negative inflation rate.
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9
Q

What is the link with inflation and purchasing power of money?

A

Inflation means price of goods rise, therefore, the same amount of money will purchase a smaller quantity of goods.

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10
Q

What is Hyper Inflation?

A
  • Is generally considered to occur when inflation is greater than 1000%.
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11
Q

What happens to the value of money with Hyper Inflation?

A
  • Money loses its value so rapidly that nobody wants to use it as a medium of exchange.
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12
Q

What are the Economic Costs of Inflation?

A
  • Decline in value of savings - Uncertainty for business leading to less investment. - A decline in the competitiveness of exports (if inflation higher than other countries.)
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13
Q

What is Demand Pull inflation?

A
  • Is when the economy is at FULL EMPLOYMENT - Increase in AD leads to an increase in price level - When firms hit full capacity they respond by putting up prices. - CAUSING INFLATION
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14
Q

How does demand pull inflation affect spending power of consumers?

A
  • Near full employment means there are LABOUR SHORTAGES. - Workers can then get pay increases which increases their spending power.
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15
Q

Graph showing Demand Push inflation.

A
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16
Q

How can Aggregate Demand increase??

A
  • By an increase in any one of its components
  • C+I+G+X-M
17
Q

When do we tend to get Demand Pull inflation?

A

If economic growth is above the long-run trend rate of growth.

18
Q

What is the long-run trend rate of economic growth?

A
  • is the average sustainable rate of growth and is determined by the growth in productivity.
19
Q

What is Cost Push Inflation?

A

If there is an increase in the COSTS of firms, then businesses will pass this on to consumers. There will be a shift to the left in the AS.

  • All to do with SUPPLY
20
Q

Diagram showing how cost push inflation works when there is an increase in the cost for firms.

A
21
Q

How does Rising Wages affect cost push inflation?

A
  • If trade unions can unite together and create movement they can bargain for higher wages.
  • Rising wages causes cost puch inflation because wages are businesses biggest costs
  • Higher wages may also contribute to rising demand.
22
Q

How does import prices affect cost push inflation?

A
  • If there is devaluation then import prices become more expensive leading to an increase in inflation
23
Q

How does Raw Material Prices affect Cost Push Inflation?

A
  • Best example is OIL
  • Affects company costs
24
Q

How does Profit Push Inflation affect Cost Push Inflation?

A
  • When firms push up prices to get higher rates of inflation.
  • T his is more likely to occur during strong economic growth.
25
Q

How does Declining Productivity cause Cost Push Inflation?

A
  • If firms become less productive and allow costs to rise, this invariably leads to higher prices.
26
Q

How does Higher Taxes cause Cost Push Inflation?

A
  • If the government put up taxes
  • This will lead to higher prices, and therefore CPI will increase.
27
Q

Evaluative point for how Higher Taxes causes Cost Push Inflation?

A
  • However, these tax rises are likely to be one-off increases
28
Q

How could Rising House Prices cause Inflation?

A
  • Rising House Prices does not directly affect inflation
  • But cause a positive wealth affect and encourage consumer lead economic growth
  • This can indirectly cause demand-pull inflation
29
Q

How does Printing more Money cause inflation?

A

Economics - Macro (27 decks)

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