Inflation pt2

Question 1

Closer look at deflation

Answer 1

Increasing the real value of cash money and all monetary items. Caused by a decrease in AD (decreased confidence) or an increase in AS (lower production (Increased SRAS) cost or technological advances (increased LRAS)-increased output, excess supply

Question 2

Benefits of deflation

Answer 2

Increased purchasing power of consumers

Question 3

Issues with deflation

Answer 3

Higher employment
Less consumption
Less investment spending
Lower economic growth

Question 4

Causes of inflation

Answer 4

Excess AD=Demand pull inflation
General rise in COP=Cost push inflation

Question 5

Demand pull inflation

Answer 5

Mainly caused by AD increasing quicker than AS (excess AD) . E.G. Decreased tax rate, rising consumer confidence, reduces exchange rate, boost in UK’s exports. Increases in price level are caused by increases in AD. Usually during the boom phase. Increased demand pulls up price level.

Question 6

Cost push inflation

Answer 6

Happens when SRAS decreases (COP rises). Increases in price level are caused by rising COP (inputs) . e.g. wages/raw material prices / oil prices increase. COP is pushed onto consumers.