Inflation flashcards

Question 1

What’s inflation?

Answer 1

A continuing rise in prices OVER A PERIOD OF TIME!!!!

Question 2

What’s aggregate demand?

Answer 2

The total demand for all expenditures in the econonmy

Question 3

What’s deflation?

Answer 3

Aggregate demand falls, inflation is negative and prices decrease

Question 4

What’s disinflation?

Answer 4

Inflation is positive but falling slowly, disinflation causes prises to rise and the value of money to fall

Question 5

What’s CPI?

Answer 5

Measure of the general price level excluding housing costs from the same price info monthly

CPI uses a shopping basket

Question 6

How to calculate CPI?

Answer 6

The cost of basket in year X / The cost of basket in base year x 100

Percentage diff between CPI of 2 years:
final CPI - initial CPI/initial CPI x 100

Question 7

What are the two types of inflation?

Answer 7

Demand Pull inflation
Cost Push inflation

Question 8

What’s demand pull inflation?

Answer 8

Inflation caused by excess demand in the ecoonmy relative to supply

If demand increases, price increases

Question 9

What are causes of demand pull inflation?

Answer 9

• Rising consumer spending due to tax cuts or low interest rates
• Sharp increases in gov spending
• Rising demand for resources by firms
• Booming demand for exports

Question 10

What’s cost push inflation?

Answer 10

When businesses push the costs to the consumers in an economy

When businesses are faced with rising costs, they put up their prices to protect their profit margins and inflation gets cauased

Question 11

What are causes of cost push inflation?

Answer 11

Rising costs of imported goods like oil

Wage increases - Trade unions put pressure on employers to increase wages and employers recover the extra money to pay to the workers by increasing prices

Increase in tax

If entrepreneurs try to increase the amount of profit

Question 12

How might interest rates affect inflation?

Answer 12

Governments raise interest rates to decrease the rate of inflation

If interest rates rise, borrowing will fall as it becomes more expensive and the money supply falls hence, demand falls resulting in decreased inflationary pressure

Question 13

Impact of inflation on prices?

Answer 13

As prices rise, inflation reduces the purchasing power of money meaning people can’t buy as much with their income and living standards decreases

Question 14

Impact of inflation on wages

Answer 14

As prices rise, workers need to increase wages to compensate for the loss in purchasing power. Wages may need to rise to keep up with inflation as real wages fall

As a result of higher wages, firms increase their prices due to THEIR costs rising and if this pattern repeats, a wage spiral develops; higher prices lead to even higher prices hence, inflation gets caused.

Demand for higher wages during inflation causes conflict between employers and trade unions causing a strike hence, a loss for both the workers and the firms.

Question 15

Impact of inflation on exports

Answer 15

As prices increase domestically more than in other countries, firms may find it difficult to sell in overseas markets due to rising prices of exports hence, demand for exports falls and the balance of payments is affected negatively.

Question 16

Impact of inflation on unemployment

Answer 16

• As inflation decreases, prices decrease and aggregate demand rises resulting in firms being keen to increase output and them wanting to recruit more workers which reduces unemployment
• It’s important to note that the government can use monetary and fiscal policy tools to manage the level of inflation without necessarily causing high levels of unemployment

Question 17

Impact of inflation on Menu Costs

Answer 17

As prices increase, firms will have to tell customers which will cost money due to advertisement costs like new brochures being made and sales staff would need to be informed falling into the menu costs

These are called menu costs as for a restaurant a new menu has to be printed when prices increase.

Question 18

Impact of inflation on Shoe Leather Costs

Answer 18

As prices rise, costs to firms and consumers of searching for new suppliers for the best deals rise too hence, opportunity costs are also incurred as time is wasted whilst doing so

Question 19

Impact of inflation on uncertainty

Answer 19

As prices rise, firms don’t know what prices will be in the future and planning for the future becomes impossible

Decisions will have to be made on the spot which will affect businesses in the long term

Question 20

Impact of inflation on Business & Consumer confidence?

Answer 20

As prices rise, the uncertainty rises too which has an affect on the confidence of businesses and consumers.

High prices make consumers anxious and cautious with their spending leading them to save more which reduces demand

High prices make businesses anxious as they may postpone growth plans or become cautious with spending on r&d hence, lack of confidence leads to less risk taking and economic growth decreases.

Question 21

Impact of inflation on investment

Answer 21

As prices rise, uncertainty about future prices does too hence, investment projects become postponed or cancelled leading to negative economic growth and negative future level of employment in the economy

Question 22

What do the effects of inflation depend on?

Answer 22

• The cause of the inflation
• The rate of the inflation
• Whether the rate is accelerating or stable
• Whether the rate was expected
• How the rate compares with other countries

Question 23

Which is more harmful, Demand pull or cost push?

Answer 23

Demand pull is less harmful as it shows increasing output by a firm

If there’s high levels of uncertainty about the future, it will cause the most negative consequences like not being able to effectively plan

Question 24

impact of inflation on savings

Answer 24

as prices rise, The real value of savings falls due to inflation and as purchasing power of money falls, consumers can only buy a few goods

Question 25

What’s menu costs?

Answer 25

the costs incurred by a business when it changes the prices it offers to its customers

A classic example is a restaurant that has to physically print new menus when it changes the prices of its dishes

Question 26

What’s shoe leather costs?

Answer 26

the time and effort people take to minimize the effect of inflation by searching for the best deals from suppliers hence, an opportunity cost is incurred as time is wasted.