Inflation Impact Flashcards
What is high inflation?
A sustained increase in the general price level of goods and services in an economy over a period of time.
High inflation can erode purchasing power and savings.
Who are typically the losers during high inflation?
Individuals and groups such as:
* Pensioners
* People on fixed incomes
* Low income groups
* Savers
* Those just below the tax threshold
These groups often see their real income diminish as inflation rises.
Who can be considered winners during high inflation?
Individuals and groups such as:
* Borrowers
* Exporters
* Businesses with pricing power
They may benefit as the value of debt decreases and prices for their goods rise.
What are two negatives of high inflation?
- Falling real incomes
- Negative real interest rates
Falling real incomes occur when wage increases do not keep pace with inflation, while negative real interest rates happen when savings interest rates are lower than inflation.
What is the regressive effect of inflation?
Inflation disproportionately affects lower-income families, as most of their wealth is held in cash.
This means they have less ability to adjust to rising prices.
What is meant by ‘cost of borrowing’ in the context of high inflation?
High inflation may lead to increased interest rates for consumers and businesses with debts, such as rising mortgage rates.
Higher costs can deter borrowing and spending.
Define ‘menu costs’.
The costs incurred from changing price lists frequently due to high inflation.
Modern technology has helped to reduce these costs.
What are ‘shoe leather costs’?
The costs associated with making more trips to the bank to avoid losing interest on cash held.
This behavior arises as people hold less cash during high inflation.
What is stagflation?
A situation in which inflation and unemployment rise simultaneously, often accompanied by stagnant economic growth.
It presents a challenge for economic policy, as measures to reduce inflation may increase unemployment.
What are the main causes of stagflation?
Stagflation can be caused by:
* Supply shocks
* Increased production costs
* Poor economic policies
These factors can lead to reduced output and increased prices.
True or False: High inflation always benefits savers.
False
High inflation erodes the purchasing power of savings, making it disadvantageous for savers.
Fill in the blank: Many governments target a low but _______ rate of inflation.
[positive]
This approach is believed to promote economic stability.
What is the impact of high inflation on business competitiveness?
A high relative rate of inflation can reduce competitiveness, lowering demand for the country’s exports.
This can lead to a decline in economic growth.
What is a potential consequence of high and volatile inflation on businesses?
It may lead to a fall in capital investment due to uncertainty about costs and prices.
Businesses may hesitate to invest in expansion or new projects.
Why is high inflation an economic problem?
-Inequality
- Falling real incomes
- Negative real interest rates
- Cost of borrowing
- Risks of wage inflation
- Business competiveness
- Busines uncertainty
