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Economics > Inflation- Causes > Flashcards

Inflation- Causes Flashcards

1
Q

What is inflation?

A

A general increase in prices and fall in the purchasing value of money.

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2
Q

What is the difference between deflation and disinflation?

A

Deflation is a decrease in the general price level, while disinflation is a slowing rate of inflation.

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3
Q

How do we measure inflation in the UK?

A

Using indices like the Consumer Price Index (CPI) and the Retail Price Index (RPI).

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4
Q

What is demand-pull inflation?

A

Inflation that occurs when aggregate demand grows at an unsustainable rate, leading to a positive output gap.

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5
Q

What causes demand-pull inflation?

A
  • Excess demand
  • Full employment of resources
  • Inelastic aggregate supply.
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6
Q

What is cost-push inflation?

A

Inflation that occurs when firms increase prices to protect profit margins due to rising costs.

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7
Q

List some causes of cost-push inflation.

A
  • Rising unit labor costs
  • Higher prices for components/raw materials
  • Depreciation in exchange rate
  • Increase in business taxes.
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8
Q

What is the wage-price spiral?

A

A cycle where increased wages lead to higher production costs, resulting in increased prices, which in turn leads to demands for higher wages.

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9
Q

What are internal causes of inflation?

A

Factors originating within the economy, such as wage increases and inflation expectations.

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10
Q

What are external causes of inflation?

A

Factors originating outside the economy, such as global commodity prices and exchange rates.

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11
Q

True or False: Once inflation becomes established, it is easy to remove.

A

False.

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12
Q

What is the quantity theory of money?

A

The theory that increases in prices are caused solely by increases in the money supply.

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13
Q

Who is associated with the statement ‘Inflation is always and everywhere a monetary phenomenon’?

A

Milton Friedman.

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14
Q

What equation represents the quantity theory of money?

A

MV = PT.

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15
Q

In the equation MV = PY, what does ‘Y’ represent?

A

National output.

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16
Q

Fill in the blank: If the money supply (M) is £200, the velocity (V) is 10, and national output (Y) is 100, then the average price level (P) is _______.

A

20.

17
Q

What happens to average price level (P) if the money supply (M) doubles and other factors remain constant?

A

P will double.

18
Q

What is the monetary transmission mechanism?

A

The process by which an increase in the money supply leads to inflation through various economic effects.

19
Q

List the steps in the monetary transmission mechanism.

A
  • Increase in money supply
  • Fall in interest rates
  • Increase in asset prices
  • Increased confidence
  • Increase in domestic demand.
  • Demand-pull inflation.
  • Cost-push inflation.
20
Q

What is a liquidity trap?

A

A situation where low or zero interest rates fail to stimulate spending.

21
Q

What is a common criticism of the quantity theory of money?

A

It assumes that velocity (V) and output (Y) are fixed.

22
Q

What is the significance of inflation expectations?

A

Higher inflation expectations can lead to increased wage claims and rising costs.

23
Q

What is hyperinflation?

A

An extremely high and typically accelerating inflation rate.

24
Q

What can trigger an inflationary spiral?

A

Continuous increases in wages and prices leading to further inflation.

25
Q

What is the impact of a depreciation in the exchange rate on inflation?

A

It can lead to a rise in import costs, contributing to cost-push inflation.

26
Q

What is the formula for isolating price level (P) in the quantity theory of money?

A

P = (MV) / Y.

27
Q

List some factors affecting inflationary pressure inflation

A
  1. Rising property price
  2. Increasing world oil prices
  3. Deprecating exchange rate
  4. Rapid expansion of money and credit from banks
28
Q

Explain how rising property prices effect inflation

A
29
Q

Explain how increasing world oil prices effect inflation

A
30
Q

Explain how a deprecating exchange rate effects inflation

A
31
Q

Explain how a rapid expansion of money and credit from banks effects inflation

A
32
Q

Explain how a rapid expansion of money and credit from banks effects inflation

A

Economics (22 decks)

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