lesson 9 Flashcards
when we have reflationary growth…
we have a lot of spare capacity so there is no inflation actually associated with this actual growth
lower interest rates
increased government spending
increased taxes
when we have inflationary growth there is…
supply constraints
when we have spare capacity there is…
increased unemployment
lack of demand so we have to stimulate it with expansionary policies
what are the three rates of inflation?
creeping
accelerating
hyperinflation
four reasons for inflation
cost push
demand pull
too much money
imported inflation (weak currency)
when do we have a wage squeeze?
when the wages may be rising but not as fast as the bills so essentially we are getting poorer
what can a weak pound result in?
rising importing prices
what are the four reasons for demand pull inflation?
a consumer boom
increase in government spending
an increase in net exports
money supply grow
in terms of demand pull inflation what does a consumer boom mean?
confidence is high for the future so households increase their spending. there is high AD so firms are competing for resources so costs drive up and in turn so does prices
in terms of demand pull inflation what does an increase in government spending do?
government spending increases to raise economic output
in terms of demand pull inflation what does an increase in net exports do?
it may cause inflation if the economy is using nearly all of its resources
in terms of demand pull inflation if our money supply is growing faster than our output what does it mean?
there is an increase in the money supply which directly increases prices. there is excessive growth of the money supply increasing AD which would increase output in the short run but in the long run it will lead to demand pull inflation
what is cost push inflation?
when costs increase but is not associated with Yfe, demand or supply constraints
oil prices are rising and they are priced in $, what does this mean for us as British importers?
if the £ is weakening then that means we are paying more for oil.
what does rising production costs do to producers?
discourages them
rising costs as a result of supply constraints is what type of inflation?
demand pull inflation
rising costs for reasons not associated with supply constraints, Yfe or demand is what type of inflation?
cost push inflation
rising costs as a result of rising import prices is what type of inflation?
imported inflation
how can the economy grow without causing a rise in inflation?
create new capacity to boost LRAS
use up spare capacity
explain why higher prices and lower wage growth is a concern to policy makers.
it can lead to a fall in wages which is going to result in lower living standards due to the wage squeeze people will be poorer
explain the monetarist view of inflation.
an increase in the supply of money has a direct and positive relationship with an increase in price
four policies the government might use when there is spare capacity in the economy.
increase government spending
decrease tax rates
decrease interest rates
QE
five policies the government might use when there is spare capacity in the economy.
decrease government spending
increase tax rates
increase interest rates
education/ training
firms investing
what are the 5 troubles with inflation?
- basic costs - businesses will have to change things like menus which can be a hassle
- wage squeeze - wages are rising slower in comparison to the rate of inflation
- wage price spiral - workers lose spending power, causing them to push for higher wages which raises costs for firms resulting in more inflation
- inflationary noise - confused consumers, falling consumption leading to falling investment
- international competitiveness - if our inflation is higher than our competitors our international competitiveness falls
what is the definition of deflation?
the sustained fall in the general price level
what is malign deflation caused by and its definition?
fall in AD and is bad news
its the sustained fall in price level, output and employment caused by a steep and persistent fall in AD
what is benign deflation caused by and its definition?
falling prices but rising output so not so bad news
a fall in the general price level brought about by a shift of the short run aggregate supply curve
if the rate of inflation is running at the same rate what happens to the price level?
prices will be rising at the same rate as before as inflation is still taking place
explain why a buoyant housing market and low interest rates might lead to inflation.
more people are incentivised to buy houses due to the rising prices so there is more spending and less saving as its cheaper to borrow money which greatly increases consumption
