inflation and deflation

Question 1

inflation definition

Answer 1

sustained rise in the general price level over time, meaning the cost of living increases and purchasing power decreases

Question 2

Deflation definition

Answer 2

Average price level of the economy falls, there is a negative inflation rate

Question 3

2 different causes of inflation

Answer 3

Demand pull inflation

cost push inflation

Question 4

what is cost push inflation

Answer 4

supply side of the economy – occurs when firms face rising costs

Cost-push inflation occurs when overall prices increase (inflation) due to increases in the cost of wages and raw materials

Question 5

what is demand pull inflation

Answer 5

from the demand side of the economy – when AD is growing unsustainably – pressure on resources – producers increase prices – for greater profits – occurs when resources are fully employed

Question 6

what are 3 triggers of demand pull inflation

Answer 6

A depreciation in the exchange rate – causes imports to become more expensive – exports cheaper – AD rises

Fiscal stimulus in the form of lower taxes or more gov spending – consumers have greater disposable income – consumer spending increases

Low interest rates make saving less attractive and borrowing more attractive – consumer spending increases

Question 7

what are 4 triggers of cost push inflation

Answer 7

Changes in world commodity prices can affect domestic inflation – raw materials might become more expensive if oil prices rise – increases cost of production

Labour becomes more expensive – through trade unions

Expectations of inflation – if price is to rise – consumers will ask for higher wages – trigger more inflation

Indirect taxes could increase the cost of goods such as cigarettes or fuel

Question 8

effects of inflation on consumers

Answer 8

Those on low fixed incomes are hit hardest by inflation – due to regressive effect – as necessities become more expensive – purchasing power of money falls – high income effected the least

If consumers have loans – value of repayment will be lower – because the amount owed does not increase with inflation – real value of debt decreases

Question 9

effects of inflation of firms

Answer 9

Low interest rates means borrowing and investing is more attractive than saving – with inflation interest rates are higher – firms less likely to invest

Workers may demand higher wages – increase cost of production

Firms may be less price competitive with global competitiors

Question 10

effects of inflation on the government

Answer 10

The government will have to increase the value of the state pension and welfare payments – as cost of living increases

Question 11

effects of inflation on workers

Answer 11

Real income fall with inflation – workers have less disposable income

If firms face higher costs – there could be more redundancies when firms cut costs