Inflation + Deflation Flashcards
Define Inflation
A sustained rise in the general price level. The general price level is measured by the Consumer price index
Define Deflation
A fall in the general price level
Define Disinflation
Prices are higher, but at a lower rate than before. e.g. if inflation lowers from 3% to 2%
How is inflation measured
CPI or RPI (which includes housing prices but can't be compared internationally)
What is Survey 1 in CPI
Living costs and food survey
7,000 households surveyed and they record all their purchases,
this is to determine a basket of the most common 650 goods, also the % of income on a good is calculated to find the “weight”
What is survey 2 in CPI
The prices of the 650 goods
+ services in different retail outlets, (on average around 200 prices per good)
What are the UK’s inflation targets
2% +/- 1%
Effects of high inflation on consumers
The real value of savings falls
The real value of debt falls
Effects of high inflation on Firms
Loss of international price competitiveness
Investment from abroad may fall
Investment may increase
Menu costs (changing signs, labels, vending machines)
Effects of high inflation on the government
Has to spend more helping those out on low fixed incomes
The gov’s huge borrowing becomes cheaper to pay back since the real interest rate has fallen
Effects of high inflation on workers
Some may gain higher wages
Some workers may find it difficult to get work since firms are more reluctant to invest in all factors of production
What is Demand-pull inflation
AD pressures in the economy pull prices up (rightward shift)
What is Cost-push inflation
When cost of production increases, making it more expensive to supply, pushing prices up (SRAS shifts left)
Why growth of the money supply can cause demand pull inflation:
^ money supply will cause inflationary pressures as individuals + firms can spend their excess money on goods+services, increasing AD
What is a Deflation spiral
Where decreasing price levels trigger a chain reaction that leads to lower production, lower wages, decreased demand, and even lower price levels. During a recession, the deflation spiral is a significant economic challenge because it further worsens the economic situation.
