L23 - Inflation in the Macroeconomic Model

Question 1

What are the sources of Inflation?

Answer 1

• Demand Shocks

- Supply Shocks

Question 2

What is the Great Moderation?

Answer 2

Period where Low inflation and high output (90’s to 08)

Question 3

What is Stagflation?

Answer 3

Where Output stagnant, but prices go up

Question 4

What are Demand Shocks?

Answer 4

Unanticipated Events that lead to unanticipated changes in planned aggregate expenditure

Question 5

What are Supply Shocks?

Answer 5

unanticipated events that lead to firms changing their planned output
levels.

Question 6

Why do people demand money?

Answer 6

purchasing power over goods

- real money.

Question 7

What is Pure Inflation?

Answer 7

When goods and input prices rise at the same rate

Question 8

What will happen when we have changes in Input Prices?

Answer 8

Rises in input prices will shift the SRAS curve to the left and fall shift to right.

Question 9

What are the two main categories of inputs that can change prices in short run?

Answer 9

• Materials and fuels

- Labour.

Question 10

Why is Inflation considered to be undesirable?

Answer 10

-Distorts the signals that are provided by the
price system
- Creates arbitrary redistribution from debtors to creditors;
-Creates incentives for speculative as opposed to productive
-Investment activity; and is usually costly to eliminate.

Question 11

What was Inflation like in the UK, (1751-2003)?

Answer 11

• When UK price level fell sharply in some interwar
  years when inflation, negative.
• Since 1950, price level rose 20 fold, more than rise over previous 3 centuries.

Applies in most advanced economies.

Question 12

What is Hyperinflation?

Answer 12

Period of excessive inflation. (Where Inflation recorded at 50% or above)

• 1st country to record it is Germany
  i. e: 100 trillion note in Zimbabwe

Question 13

What happens during such periods of Hyperinflation?

Answer 13

Tends to be a flight from cash, i.e. people
hold as little cash as possible.

-Large government budget deficits help to explain
such periods.
-Persistent inflation must be accompanied by
continuing money supply growth.

Question 14

What are the differing types of Interest Rates?

Answer 14

Nominal Interest Rate:
-market interest rate.
-The annual percentage increase in the nominal value
of a financial asset

Real Interest Rate:

• The annual percentage increase in the purchasing power of a financial asset.
• The real interest rate on any asset equals the nominal interest rate on that asset minus the inflation rate.

Real Interest rate(r) =
Nominal interest rate(i) - Inflation rate(π)

Question 15

What is the Fisher Hypothesis?

Answer 15

• A 1% rise in inflation leads to a similar
  rise in nominal interest rates so real interest rates
  change little
• Says that higher inflation rate leads to similarly
  higher nominal interest rates