Inflation Flashcards
Define inflation
sustained increase in the general price level in an economy
Define deflation
price level has fallen. Inflation rate is negative
Define disinfation
the price level is rising but at a slower rate than before
Define hyperinflation
when inflation spirals out of control
what is the consumer price index
measures inflation. Select a base year and give it a value of 100. Using family expenditure survey select the most common products (about 650). Attach weights to each product, these get revised every year. multiply new price index for each product to find change in price level.
What is demand pull inflation
inflation occurring from an excessive growth in AD
What is cost push inflation
inflation occurring from an increase in the costs of producing goods and services in the economy
What can cause demand pull inflation
high consumer spending, increased demand for exports, shortages due to lack of capacity, too much money circulating in the economy. Consumer/business confidence could increase, reduction in income taxes, low interest rates, Fall in value of pound.
How can high consumer spending/too much money in the economy cause demand pull inflation
consumer/business confidence is high. Inclined to spend more. Supply unable to keep up. Firms are facing excess demand and put their prices up. More loans given out so more money to spend, excess demand so prices increase.
What can cause cost push inflation
wage levels may increase, rise in cost of imported raw materials and government decisions, high interest rates, reduction in C and increase in indirect tax.
Why does increase in wage level cause cost push
increase n costs to business of employing workers, businesses may raise prices.
Why does increase in cost of imported raw materials cause cost push
if prices rise then businesses will pass extra cost to customers. Second likely cause is fall in value of our currency, UK businesses need to pay more to import materials.
Why does government decisions cause cost push
Might increase indirect taxes. Might introduce regulations that might make it more expensive for businesses.
What does demand pull inflation cause
AD shifts right, no change in AS. More consumers and businesses spend more money but no increase in supply. PL and Y increase.
what does cost push inflation cause
AS shifted left. No change in AD.
cost push inflation and falling AD
Big surge in cost of imports, real GDP/employment levels take a hammering, fall in confidence
demand pull inflation and cost push inflation
cuts income tax
increased AS and demand pull inflation
cost of imported raw materials falls significantly, reduction in income tax, deregulation of the economy
demand pull inflation and increased AS
decrease in interest rates, real GDP and employment has increased, higher price level
why is controlled inflation good
its a necessary part of a growing economy
what can inflation cause when an economy is operating at full economy
can lead to hyperinflation. PL increases but Y doesn’t.
why can inflation be good
reduces the true value of national debt. Good for borrowers and bad for lenders.
What can cause deflation
AD shift left/ AS shift right. long recession, excessive space capacity or supply side events
What is bad about deflation
consumers may postpone demand, real value of debt rises, cost o borrowing increases, falling asset prices hit personal sector, low profit margins
How can devaluation cause inflation
increased imports cost
How can inflationary expectation cause inflation
high inflation expectations cause workers to demand wage increase and firms to push up prices
Explain income redistribution as a consequence of inflation
High inflation has regressive effects on lower income families and older people. Prices for basics increases
Explain falling RDI as a consequence of inflation
wage levels usually don’t keep pace with rising price levels
Explain negative real interest rates as a consequence of inflation
if interest rates on savings accounts are lower then the rate of inflation, then people who rely on interest from their savings will be poorer
Explain the cost of borrowing as a consequence of inflation
high inflation may lead to higher borrowing costs as financial markets protect themselves against rising prices and increase the cost of borrowing
Explain high government spending on welfare as a consequence of inflation
needed to keep up higher price levels as price of basics has increased
Explain risk of wage inflation as a consequence of inflation
high inflation can lead to an increase in pay claims as people look to protect their real incomes. This can lead to a rise in unit labour costs and lower profits for businesses
Explain business competitiveness as a consequence of inflation
If one country has a much higher rate of inflation than others for a considerable period of time, this will make its exports less price competitive in world markets
Explain business uncertainty as a consequence of inflation
high and volatile inflation is bad for business confidence partly because they cannot be sure of what their costs and prices are likely to be. This might lead to lower levels of I.
Consequence of deflation: discourages consumer spending
AD will fall. People expect that prices will fall further so they wont spend now
Consequence of deflation: real wage unemployment
due to sticky wages (rate at which no one will work for less) real wages may actually increase. However, businesses don’t want to pay higher real wages so unemployment rises
What are the other consequences of deflation
- Increased real value of debt
- Increased real interest rates
- Can become entrenched and difficult to end
How to evaluate inflation
- Size of inflation
- Depends on duration
- Type of inflation
- Overseas comparisons (higher compared to others then less competitive exports)
- Econoy’s position
- Depends on the reliability of the data
