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Macroeconomics OMAR > Macro 8 - Causes and consequences of Inflation > Flashcards

Macro 8 - Causes and consequences of Inflation Flashcards

1
Q

What are the 2 causes of inflation?

A
  1. Demand pull inflation
  2. Cost push inflation
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2
Q

Why does demand pull inflation occur?

A

AD increasing faster than AS

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3
Q

Illustrate demand-pull inflation using a diagram

A
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4
Q

Why does cost push inflation happen?

A

Because of an increase in cost of production
e.g - energy prices increase

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5
Q

Show cost push inflation using a diagram

A
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6
Q

What other factors could increase cost of production?

A

Inflation in other countries

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7
Q

What are the 7 costs of inflation?

A
  1. Shoe leather costs
  2. Menu costs
  3. Uncertainty for firms
  4. Loss of competitiveness
  5. Fiscal Drag
  6. Wage price spiral
  7. The effect on the pensioners and savers
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8
Q

What are shoe leather costs?

A

Shoe leather costs are the financial costs that are made by households in times of high inflation.

e.g - Trips to store to purchase goods or convert to a stable currency.

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9
Q

What are menu costs?

A

The costs incurred by a firm when it changes it’s prices, printing new price stickers.

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10
Q

What is the evaluation for shoe leather costs?

A

Depends on the extent of inflation

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11
Q

What is the evaluation for menu costs?

A

Menu costs only occur during periods of hyperinflation

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12
Q

What is uncertainty for firms?

A

During high inflation, this usually implies there is high likelihood of negative economic future. So, there will be less investment into captital

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13
Q

What is the evaluation of firms being uncertain?

A

Inflation may be short term, so firms may still invest

Some firms can afford to invest in periods of high inflation

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14
Q

What is loss of competitiveness?

A

Exports become more expensive.
Countries stop importing from UK.
UK becomes less internationally competitive

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15
Q

What is the evaluation for loss of competitveness?

A

Some exports have inelastic demand. So, demand may not fall as some products such as gas are bought on long term contracts.

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16
Q

What is fiscal drag?

A

Taxpayers are moved into higher tax brackets as wages rise.

17
Q

What is the evaluation for fiscal drag?

A

Depends on whether someone is near a tax bracket

Current fiscal drag and inflation is extreme and may only happen once in a lifetime

18
Q

What is wage price spiral?

A

As prices increase, firms are forced to increase wages, prices continue to increase.

19
Q

What is the evaluation for wage price spiral?

A

Firms may not pass on increased costs to customers

20
Q

What wage/price cycle is the UK in?

A

Uk is in price-wage cycle

Prices increase due to cost push inflation
Wages are increased

21
Q

What is the triple lock system?

A

The Triple lock system is what decides how pensions are increased

22
Q

What are the 3 factors of the triple lock system?

A
  1. +2.5% each year
  2. CPI
  3. Wages
23
Q

What is the effect of inflation of pensioners and savers?

A

Pensioners benefit as the Triple lock system means that pension increase with inflation.

Savers lose out as their purchasing power is eroded over time

24
Q

What is the government’s ideal inflation rate?

A

2%

25
Q

Who benefits from moderate level of inflation? (2%)

A
  1. Firms
  2. Borrowers
  3. Government
26
Q

Why do Firms benefit from moderate inflation (2%)

A

Firms can charge higher prices (greedflation)

27
Q

Why do borrowers benefit from moderate inflation (2%)

A

They pay back less

28
Q

Why does the government benefit from moderate inflation?

A

Inflation is a sign of growth

29
Q

What reasons depict whether or not inflation is harmful to the economy?

A
  1. Cause of inflation
  2. Extent of inflation
  3. Group affected
30
Q

How does the cause of inflation depict whether inflation is harmful to the economy?

A

Cost-push is harmful as it doesn’t show economic growth, it increases costs but reduces growth

31
Q

How does the group considered / affected depict whether inflation is bad for the economy or not?

A

Wealthy households are affected less

Low income groups affected more as purchasing power falls and they spend more on necessities

32
Q

Illustrate how deflation can be caused by supply-side effects. Give chains and imagine the graph.

also what is the effect of this onto UK exports?

A

Costs of production / firm invests in capital and becomes more productive
LRAS Shifts right
GDP increases from Y1 to Y2
PL decreases from P1 to P2
Exports become more internationally competitive as they become cheaper

33
Q

Illustrate how deflation can be caused by demand side effects

A

GDP decreases
PL decreases
Net exports increases
Unemployment increases

34
Q
A
35
Q

How does the extent of inflation depict whether inflation is harmful to the economy?

A

Hyperinflation is bad because firms become uncertain and don’t invest into capital goods.

Macroeconomics OMAR (27 decks)

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