Inflation- Causes Flashcards
What is inflation?
A general increase in prices and fall in the purchasing value of money.
What is the difference between deflation and disinflation?
Deflation is a decrease in the general price level, while disinflation is a slowing rate of inflation.
How do we measure inflation in the UK?
Using indices like the Consumer Price Index (CPI) and the Retail Price Index (RPI).
What is demand-pull inflation?
Inflation that occurs when aggregate demand grows at an unsustainable rate, leading to a positive output gap.
What causes demand-pull inflation?
- Excess demand
- Full employment of resources
- Inelastic aggregate supply.
What is cost-push inflation?
Inflation that occurs when firms increase prices to protect profit margins due to rising costs.
List some causes of cost-push inflation.
- Rising unit labor costs
- Higher prices for components/raw materials
- Depreciation in exchange rate
- Increase in business taxes.
What is the wage-price spiral?
A cycle where increased wages lead to higher production costs, resulting in increased prices, which in turn leads to demands for higher wages.
What are internal causes of inflation?
Factors originating within the economy, such as wage increases and inflation expectations.
What are external causes of inflation?
Factors originating outside the economy, such as global commodity prices and exchange rates.
True or False: Once inflation becomes established, it is easy to remove.
False.
What is the quantity theory of money?
The theory that increases in prices are caused solely by increases in the money supply.
Who is associated with the statement ‘Inflation is always and everywhere a monetary phenomenon’?
Milton Friedman.
What equation represents the quantity theory of money?
MV = PT.
In the equation MV = PY, what does ‘Y’ represent?
National output.
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 _______.
20.
What happens to average price level (P) if the money supply (M) doubles and other factors remain constant?
P will double.
What is the monetary transmission mechanism?
The process by which an increase in the money supply leads to inflation through various economic effects.
List the steps in the monetary transmission mechanism.
- Increase in money supply
- Fall in interest rates
- Increase in asset prices
- Increased confidence
- Increase in domestic demand.
- Demand-pull inflation.
- Cost-push inflation.
What is a liquidity trap?
A situation where low or zero interest rates fail to stimulate spending.
What is a common criticism of the quantity theory of money?
It assumes that velocity (V) and output (Y) are fixed.
What is the significance of inflation expectations?
Higher inflation expectations can lead to increased wage claims and rising costs.
What is hyperinflation?
An extremely high and typically accelerating inflation rate.
What can trigger an inflationary spiral?
Continuous increases in wages and prices leading to further inflation.
What is the impact of a depreciation in the exchange rate on inflation?
It can lead to a rise in import costs, contributing to cost-push inflation.
What is the formula for isolating price level (P) in the quantity theory of money?
P = (MV) / Y.
List some factors affecting inflationary pressure inflation
- Rising property price
- Increasing world oil prices
- Deprecating exchange rate
- Rapid expansion of money and credit from banks
Explain how rising property prices effect inflation
Explain how increasing world oil prices effect inflation
Explain how a deprecating exchange rate effects inflation
Explain how a rapid expansion of money and credit from banks effects inflation
Explain how a rapid expansion of money and credit from banks effects inflation
