Inflation/Deflation Flashcards
The Uk has the 6th
Largest economy
What is inflation
When theres a sustained increase in the general price level.
What is demand pull inflation
When AD increases, increasing price level, leading to inflation
What are the 2 types of inflation
Demand pull and cost push
What is cost push inflation
When higher costs decrease SRAS, pushing up price level, leading to inflation
What is deflation
A sustained decrease in the general price level
What is deflationary spiral?
When there is deflation meaning that there is a decrease in price level. Consumers see that prices are falling so they delay their purchases and wait for prices to fall further. This decreases AD as consumption is a component of AD. The fall in AD decreases prices again and so consumers further delay their purchases, and so the cycle repeats.
What are the 2 types of deflation?
Benign deflation and malignant deflation
What is benign deflation?
When there is an outward shift in AS
What is malignant deflation?
When there is an inward shift in AD. Malignant deflation can lead to a deflationary spiral
What is deflation caused by?
-decrease in AD
-Increase in AS
What is Nominal income
How much you earn in £ or $
What is real income
Real income is nominal income with the effects of inflation removed
What does the inflation rate tell us
The percentage change in PL
How to calculate inflation rate
(Change in PL / original PL) x 100
