MACRO L5 - Inflation

Question 1

define inflation

Answer 1

the annual percentage increase in prices of goods/services over time

Question 2

what are the two types of inflation

Answer 2

• demand pull
• cost push

Question 3

what is demand pull inflation

Answer 3

• inflation caused by percentage rises in aggregate demand

Question 4

how do firms respond to rising demand

Answer 4

• they raise prices and increase output

Question 5

what is cost push inflation

Answer 5

inflation caused by persistent rises in costs of production

Question 6

how do firms respond to rising costs

Answer 6

• they raise prices and decrease output

Question 7

what is a demand shock

Answer 7

single increase in demand (e.g. increase in government spending) that leads to a short-run increase in inflation

Question 8

what is a supply shock

Answer 8

single increase in costs (e.g. government increases tax on petrol) that leads to a short-run increase in fuel prices

Question 9

what can uncertainty over inflation lead to for firms

Answer 9

• firms lower investments, which reduces economic growth

Question 10

define hyperinflation

Answer 10

a very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase.

Question 11

what does the Phillips curve show

Answer 11

• suggests an inverse relationship between unemployment and inflation
• lower unemployment tends to be associated with higher inflation

Question 12

define stagflation

Answer 12

combination of economic stagnation (low GDP growth and high
unemployment) and high inflation