Inflation and deflation ( Macro )

Question 1

What are some causes of / why does deflation occur?

Answer 1

MALIGN:
- Occurs during periods of stagnant growth
- As prices are falling, consumers tend to delay
purchasing decisions because they think prices
will fall in the future
- Deflationary vicious cycle ( another card )

BENIGN:
- Can occur as a result of costs of production, which
isn’t harmful

Question 2

What’s a real-life example of Benign Deflation?

Answer 2

• In 2015 there was a global deflationary effect on
  oil and food prices

Question 3

What is the “vicious cycle” that can result from deflation?

Answer 3

• Prices fall, so consumers delay spending ( due to
  expectations )
• As a result, consumption slows down
• This makes firms lose confidence to invest,
  harming aggregate demand further
• Leads to additional deflation, thus repeating the
  cycle

Question 4

Why is a small ( often 2% ) inflation sought-after ( more than a lower rate )?

Answer 4

• A lower rate would be closer to deflation
• A small amount of inflation incentivises spending
  today rather than tomorrow, so demand doesn’t
  suffer

Question 5

Why is a small ( often 2% ) inflation sought-after ( more than a higher rate )?

Answer 5

• A higher inflation ( higher price ) may reduce
  spending
• It may erode the value of savings
• It can reduce real wages, especially for people on
  fixed ones

Question 6

How does inflation erode the value of money for consumers ( especially savers ) ?

Answer 6

• If wages and earnings remain constant, and prices
  rise, consumers are worse off in real terms
• This is because their disposable income will buy
  less goods and services than it did previously

Question 7

Diagram of demand-pull inflation

Answer 7

Question 8

Diagram of Cost-push inflation

Answer 8