Inflation and Monetary Policy Flashcards
What is inflation?
The rise in the price level, the general rise in prices throughout the economy, measured as some sort of average, usually expressed as a percentage per year
What is consumer price inflation?
The speed at which the prices of products bought by households rise or fall
How is consumer price inflation estimated?
By using price indices CPI
What is CPI used for?
Uprating pensions, wages and benefits
What is anticipated inflation?
If institutions adapt to known inflation the nominal interest rates, the tax rates and transfer payment, the costs are limited
What are shoe-leather costs?
Extra time and effort to keep up to date with changing prices
What are menu costs?
Alter price lists
What is unanticipated inflation?
Unintended redistribution of income
What are the different types of inflation?
Demand-pull, monetary and cost-push inflation
What is demand-pull inflation?
Inflation caused by continuing rise in AD
What can cause demand-pull inflation?
An increase in any of the components of AD (C,I,G or X)
What is monetary inflation?
Occurs when there is too much money supply in the economy: MV = PT
What is cost-push inflation?
Continuing rises in costs independent of any rises in aggregate demand
What are the causes of cost-push inflation?
Wage-push, profit-push, import-price-push and tax-push inflation
What is wage-push inflation?
When wages become higher because of trade union power
What is profit-push inflation?
Caused by firms using their monopoly power to push prices up more than they would have increased in competitive markets
What is import-price-push inflation?
Caused by rising import prices
What is tax-push inflation?
Cause by increased taxation
How does the government control inflation?
Reducing AD, reducing costs, setting inflation targets and supply-side policies to shift the AS to the right
What is deflation?
When prices are generally falling
What are the reasons for deflation?
Supply grows faster than demand and falling AD
What are the consequences of deflation?
Lower profits for firms and unemployment
What is deflationary spiral?
When lower prices leads to delated buying by households and firms
What is the phillips curve?
It shows the relationship between the rate of inflation and the rate of unemployment in both the short-run and the long-run
