Inflation, Deflation And Purchasing Power I

Question 1

What is the price level?

Answer 1

Average price of goods and services.

Question 2

What is price stability?

Answer 2

Boundary between inflation and deflation

Question 3

What is inflation?

Answer 3

An increase in general price level caused by the growth in money supply. It results in a decrease in purchasing power.

Question 4

What are the causes of inflation?

Answer 4

• 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

Question 5

What are the consequences of inflation?

Answer 5

• it affects people on fixed incomes
• affects savers and lenders
• affects people who will be paid in the future
• makes financial decisions more difficult

Question 6

What are some policies anti-inflation?

Answer 6

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.

Question 7

What is deflation?

Answer 7

A decrease in general level of prices (opposite of inflation).

Question 8

What are the causes of deflation?

Answer 8

• increase in the aggregate supply of goods
• decrease in money supply
• decrease in aggregate demand for goods
• increase in money demand

Question 9

What are the negative effects of deflation?

Answer 9

• decline in economic activity
• irregular fall in prices
• business failures
• unemployment

Question 10

What are some anti-deflationary measures?

Answer 10

• reduction in taxation
• repayment of old public debt
• subsidies
• deficit financing
• interest rate reduction
• increasing exports and reducing imports

Question 11

What is disinflation?

Answer 11

A decrease in the rate of inflation

Question 12

What is stagflation?

Answer 12

Inflation combined with high unemployment.

Question 13

What is slumplation?

Answer 13

Inflationed+recession+high unemployment

Question 14

What are the causes of stagflation?

Answer 14

• reduction in labor supply
• increases in taxes
• increase in resource costs

Question 15

How to control stagflation?

Answer 15

• not increasing wages without a productivity increase
• reducing personal and business taxes
• job creation

Question 16

Types of inflation by speed

Answer 16

Hyperinflation (fastest)
Running inflation
Moderate inflation
Creeping inflation
Price stability (almost no inflation)

Question 17

Types of inflation by causes

Answer 17

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

Question 18

What are the theories of inflation?

Answer 18

Quantity theory of money
Monetary theory of inflation
Demand-pull theory
Cost-push theory
Structural inflation theory
Rational expectations theory
Wage-price spiral

Question 19

What is the quantity theory of money?

Answer 19

Changes in general price level are determined by the changes in Money supply.

Question 20

What is the demand-pull theory?

Answer 20

When aggregate demand exceeds the aggregate supply at full employment, inflation rises.

Question 21

What is the Cost-Push theory?

Answer 21

Inflation occurs when costs increase independently of aggregate demand.

Question 22

What is the structural inflation theory?

Answer 22

As an economy develops, the growth in the inflation rate is inevitable.

Question 23

What is the rational expectations theory?

Answer 23

Economic agents form their expectations based on the past.

Question 24

What is the wage-price spiral?

Answer 24

To employ skilled labor, companies artificially raise base salaries, thus the labor costs and thus the prices.