Inflation, Deflation And Purchasing Power I Flashcards
What is the price level?
Average price of goods and services.
What is price stability?
Boundary between inflation and deflation
What is inflation?
An increase in general price level caused by the growth in money supply. It results in a decrease in purchasing power.
What are the causes of inflation?
- growth in money supply
- decrease in aggregate supply
- increase in taxes
- increase in costs of resources and imports
- unfounded increase in wages
- depreciation of local currency
What are the consequences of inflation?
- it affects people on fixed incomes
- affects savers and lenders
- affects people who will be paid in the future
- makes financial decisions more difficult
What are some policies anti-inflation?
Increasing the interest rate Increasing the minimum reserve ratio Selling government securities Freezing wages Subsidising prices of certain goods Increasing the government income Reducing government spending.
What is deflation?
A decrease in general level of prices (opposite of inflation).
What are the causes of deflation?
- increase in the aggregate supply of goods
- decrease in money supply
- decrease in aggregate demand for goods
- increase in money demand
What are the negative effects of deflation?
- decline in economic activity
- irregular fall in prices
- business failures
- unemployment
What are some anti-deflationary measures?
- reduction in taxation
- repayment of old public debt
- subsidies
- deficit financing
- interest rate reduction
- increasing exports and reducing imports
What is disinflation?
A decrease in the rate of inflation
What is stagflation?
Inflation combined with high unemployment.
What is slumplation?
Inflationed+recession+high unemployment
What are the causes of stagflation?
- reduction in labor supply
- increases in taxes
- increase in resource costs
How to control stagflation?
- not increasing wages without a productivity increase
- reducing personal and business taxes
- job creation
Types of inflation by speed
Hyperinflation (fastest) Running inflation Moderate inflation Creeping inflation Price stability (almost no inflation)
Types of inflation by causes
Monetary inflation: caused by an increase in MS
Demand-pull inflation: increase in demand
Cost-push inflation: drops in supply
Imported inflation: increase in prices of imports or currency depreciation
Bulilt-in inflation: price/wage spiral
What are the theories of inflation?
Quantity theory of money Monetary theory of inflation Demand-pull theory Cost-push theory Structural inflation theory Rational expectations theory Wage-price spiral
What is the quantity theory of money?
Changes in general price level are determined by the changes in Money supply.
What is the demand-pull theory?
When aggregate demand exceeds the aggregate supply at full employment, inflation rises.
What is the Cost-Push theory?
Inflation occurs when costs increase independently of aggregate demand.
What is the structural inflation theory?
As an economy develops, the growth in the inflation rate is inevitable.
What is the rational expectations theory?
Economic agents form their expectations based on the past.
What is the wage-price spiral?
To employ skilled labor, companies artificially raise base salaries, thus the labor costs and thus the prices.
