Inflation Flashcards
Define Inflation.
- Is a sustained rise in the cost of living and average price level.
What 2 Factors directly cause inflation?
- Demand Pull (Rising AD) - Cost Push (SRAS shift left) - High inflation expectations
What causes Demand Pull Inflation?
- Interest rate cut - Rising Wages - Increased confidence - Increased money supply
What causes Cost Push inflation?
- Rising Oil Prices - Rising Wages - Higher Taxes - Devaluation (rising import prices)
How does inflation affect the value of money?
Leads to a decline in the value of money
What is the inflation rate?
Is the annual percentage change in price level
How is inflation measured?
Through government statistics such as: - RPI (Retails Price Index) - CPI (Consumer Price Index)
Define Deflation.
- Is a fall in the price level of the economy. It means there will be a negative inflation rate.
What is the link with inflation and purchasing power of money?
Inflation means price of goods rise, therefore, the same amount of money will purchase a smaller quantity of goods.
What is Hyper Inflation?
- Is generally considered to occur when inflation is greater than 1000%.
What happens to the value of money with Hyper Inflation?
- Money loses its value so rapidly that nobody wants to use it as a medium of exchange.
What are the Economic Costs of Inflation?
- 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.)
What is Demand Pull inflation?
- 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
How does demand pull inflation affect spending power of consumers?
- Near full employment means there are LABOUR SHORTAGES. - Workers can then get pay increases which increases their spending power.
Graph showing Demand Push inflation.
How can Aggregate Demand increase??
- By an increase in any one of its components
- C+I+G+X-M
When do we tend to get Demand Pull inflation?
If economic growth is above the long-run trend rate of growth.
What is the long-run trend rate of economic growth?
- is the average sustainable rate of growth and is determined by the growth in productivity.
What is Cost Push Inflation?
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
Diagram showing how cost push inflation works when there is an increase in the cost for firms.
How does Rising Wages affect cost push inflation?
- 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.
How does import prices affect cost push inflation?
- If there is devaluation then import prices become more expensive leading to an increase in inflation
How does Raw Material Prices affect Cost Push Inflation?
- Best example is OIL
- Affects company costs
How does Profit Push Inflation affect Cost Push Inflation?
- When firms push up prices to get higher rates of inflation.
- T his is more likely to occur during strong economic growth.
How does Declining Productivity cause Cost Push Inflation?
- If firms become less productive and allow costs to rise, this invariably leads to higher prices.
How does Higher Taxes cause Cost Push Inflation?
- If the government put up taxes
- This will lead to higher prices, and therefore CPI will increase.
Evaluative point for how Higher Taxes causes Cost Push Inflation?
- However, these tax rises are likely to be one-off increases
How could Rising House Prices cause Inflation?
- 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
How does Printing more Money cause inflation?
