Inflation & Deflation

Question 1

What is inflation?

Answer 1

Inflation is a sustained increase in the general price level leading to a fall in the purchasing power of money

Question 2

What are the main causes of inflation?

Answer 2

• Credit boom
• Higher wage costs
• Increased energy bills
• Falling exchange rates

Credit boom explained: As the provision of credit is increased or barriers to accessing credit are decreased - for example with low interest rates, increases the supply and access of credit to those on lower incomes, increasing their disposable income and therefore their propensity to spend, shifting AD outwards, contributing to demand push inflation.

Higher wage cost explained:
Increased production costs, referring to the cost incurred by firms to produce goods, for example higher wage costs, can cause inflation.

Higher wage costs are an example fixed costs and when added to variable costs, results in revenue and minused by costs, results in profit. Firms have the main motive to maximise this, which is done by decreasing costs and increasing revenue. The increased wage costs increases the costs for firms, decreasing their revenue remains constant (certis paribus