Inflation and deflation Flashcards
Define Inflation
A sustained rise in general price level
Define Deflation
A sustained fall in general price level
Define disinflation
The rate of inflation slows
Define Rate of Inflation
The rate at which the gpl increases over a certain period of time
What is the CPI
Consumer price index - measure of the GPL of 650 household goods
What are the costs of inflation
Firm
-Constantly having to change prices to keep up with the market
-insufficient info on prices so missalocation of resources
-Increased prices will cause foreingers to be put off if the exchange rate stays the same
Consumer/worker
-Wage price spiral which is where wokers demand higher wages to keep up with the rising cost of living (an example of this is the NHS after covid)
-Those with fixed incomes will be at a disadvantage
-Consumers will not know when to buy things at the right prices
Demand pull inflation
Caused by an increase in AD
Economy close to full capacity
Positive output gap
Draw Demand pull inflation diagram
AD shifts outwards
PL increases as well RGDP
Impact of Demand pull inflation
Decreased interest rates
Lower corporation tax
Increased consumer/firm confidence
Increased Government spending ( G in AD equation)
Weak exchange rate
Cost push inflation
SRAS inward shift
Increased price level
Decreased RGDP
Draw a cost push inflation diagram
SRAS inward shift
Increased price level
Decreased RGDP
Impacts of cost push inflation
Increased raw material prices
Increased wages
Increased business taxes (VAT)
Increased raw material prices
Internal causes of inflation
Surge in property prices
Higher wages/labour costs
Rise in business taxes
Boom in credit
External causes of inflation
Increased world prices of things like oil
Depreciation of exchange rate
Higher inflation in other countries
Winners from inflation
Producers if prices rise faster than costs
Strong wage bargaining power
Debtors if interest rates fall
Losers from inflation
Retired on fixed incomes
Lenders if real interest rates are negative
Savers if real returns are negative
Workers in low paid jobs
Costs of inflation
Lower purchasing power
erosion of savings
lower export competitiveness
consumer price spiral
fiscal drag
inflationary noise
Benefits of inflation
increased wages for workers
unemployment low during recession
firms urged to increase production
reduces real value of debt
improved gov. finances
Draw demand side deflation diagram
RGDP and PL shift inwards
Demand side deflation
malignant deflation
lower growth
long term and anticipated :
-delayed spending
-increased real value of debt
Supply side deflation
Benign deflation
Higher growth
short term and unanticipated :
-falling prices for consumer
-falling input prices for firms
