Macroeconomics- Inflation And Deflation Flashcards
What is inflation?
The continuing rise in the average price level
The government target is 2%
What is deflation?
A continuing fall in the average price level
What is disinflation?
When the rate of inflation is falling
(e.g when inflation falls from 3% to 2%)
What is stagflation?
When AD/GDP is falling yet inflation is increasing
What are inflationary and deflationary policies?
Inflationary- policies that try to increase inflation and AD
Deflationary- policies that try and decrease inflation and AD
How is inflation measured?
Using the consumer price index (cpi)
What are the two types of inflation?
Demand pull inflation- caused by an increase in AD, excess demand causes a rise in prices
Cost push inflation- increased cost of production incentises firms to reduce supply
What is wage cost inflation?
When trade unions bargain for higher wages and better working conditions cost of production increases which leads to cost push inflation
What is import cost and factory cost inflation?
Import cost- when a country imports inflation (e.g when there is a rise in the cost of imported raw materials)
Factory inflation- the change in the price of goods leaving factories. If there’s an increase then this is likely going to be reflected in price rises in shops
What is meant by inflation psychology?
People’s behaviour can change based on their predictions for inflation
E.g if inflation is predicted to rise people will spend now before prices rise
What are the causes of deflation?
Benign deflation- cause by an increase in aggregate supply (cost of production decreases)
Malign deflation- caused by a fall in AD and economic activity
What are the effects of inflation?
Distributional effects- debt increases income decreases
Shoe leather and menu costs
Psychological and political costs
Breakdown in the function of money
Decrease in international competitiveness
Decrease in employment and growth
