Inflation and Deflation Flashcards
What is inflation?
The sustained rise in the general price level over time. This means that the cost of living increases and the purchasing power of money decreases
What is deflation?
Where the price level in an economy falls, i.e there is negative inflation.
What is price level?
The average of current prices across the entire spectrum of goods and services produced in an aconomy
What is disinflation?
The falling rate of inflation. This means the average price level is still rising, just to a slower extent. This means that goods and services are relatively cheaper than a year ago
What is the aim of deflationary policies?
To reduce aggregate demand
What is demand pull inflation?
When aggregate demand is growing unsustainably so there is pressure on resources and producers increase their prices. This usually occurs when resources are fully emplo
What are the triggers for demand pull inflation?
- A depreciation in the exchange rate
- Fiscal stimulus
- Lower interest rates
- High growth in UK export markets
How does a depreciation in the exchange rate trigger demand pull inflation?
This causes imports to become more expensive whilst exports become cheaper, causing AD to rise
How does a fiscal stimulus trigger demand pull inflation?
Fiscal stimulus in the form of lower taxes or more government spending means consumers have more disposable income and therefore consumer spending increases
How do lower interest rates trigger demand pull inflation?
Lower interest rates make saving less attractive and borrowing more attractive, so consumer spending increases
How does growth in UK export markets trigger demand pull inflation?
High growth means UK exports increase and therefore AD also increases
What is cost push inflation?
When firms face rising costs so increases their prices
What are the possible causes of cost push inflation?
- Changes in prices of goods
- Labour becoming more expensive
- Expectations of inflation
- Indirect taxes
- Depreciation in the exchange rate
- Monopolies
How do changes in the price of goods cause cost push inflation?
When the world price of goods increase this can make raw materials more expensive and increase the cost of production
How does changes in the price of labour cause cost push inflation?
Labour becoming more expensive (for example due to trade unions) means that the cost of production increases
How does the expectation of inflation cause cost push inflation?
If consumers expect prices to rise then they may ask for higher wages, triggering more inflation
How do indirect taxes cause cost push inflation?
If producers choose to pass the costs onto customers then taxes on goods can cause inflation
How does depreciation in the exchange rate cause cost push inflation?
Imports become move expensive, pushing up raw material prices
How can monopolies can cost push inflation?
They may use their dominant market position to exploit consumers with high prices
What are the effects of inflation on consumers on low/fixed incomes?
Those on lower or fixed incomes are hit hardest due to inflations regressive effect as the price of essential goods increases
How does inflation affect consumer loans?
Loan repayments will be lower as owed debt does not increase with inflation, meaning the real value of debt decreases
How does inflation affect interest rates and investment?
As high inflation increases, interest rates also increases meaning the cost of investment will be higher. This results in a reduction in investment.
How does inflation affect wages?
Workers may demand higher wages, increasing the cost of production for firms
How does inflation affect a firms price competetiveness?
If inflation is high then firms may be unable to compete on global markets. However, this is reliant on how other countries are performing.
