Inflation and deflation Flashcards
What is the price level?
The price level is the average price of goods and services
What does price stability mean?
Price stability sits between inflation and deflation
What are the advantages of price stability?
- people can make better decisions regarding consumption and investment
- it contributes to employment
What is inflation?
Inflation is the increase in the general price level
What are the causes of inflation?
Inflation can be caused by:
- growth in money supply
- increase in aggregate supply of goods & services
- decrease in aggregate demand of goods & services
- increases in taxes
- increases in cost of resources
- increases in wages faster than productivity
What are the consequences of inflation?
- it makes financial decisions more difficult
- it affects savers and lenders (because interest rates can be negative)
- it discourages economic growth
What are some anti inflationary measures?
Some anti inflationary measures are:
- Monetary policy measures
- Fiscal policy measures
What are some monetary policy measures for inflation?
- increasing interest rates
- selling government securities to banks
- increasing reserve requirements
What are some fiscal policy measures against inflation?
- reducing government spending
- increasing governemt income trough taxes
What is deflation?
Deflation is pretty much the opposite in inflation, meaning a decrease in the general level of prices.
(it is worse than inflation because it leads to lower wages and productivity)
What are some causes of deflation?
- increase in the supply of goods
- decrease in the money supply
- decrease in demand
- increase in money demand
What are some effects of deflation?
- decline in economic activity
- irregular fall in prices
- business failures
- unemployment
What is disinflation?
Disinflation is a decrease in the rate of inflation
What is stagflation?
Stagflation is a combination of stagnation and inflation.
How can we classify inflation?
- By intensity
- By causes
- By anticipations
