mock Flashcards
explain demand pull inflation
- caused by lower interest rate / higher house prices = stimulate spending and increase AD
- movement closer to full employment (more employment = more spending)
- pressure on FoP
- higher prices
explain cost push inflation
- rise in cost of production = can be due to a fall in the exchange rate (increase domestic costs of imported goods)/ higher wages/ higher tax
- reduced business profit margins
- prices are increased to compensate
what is the positive wealth effect?
when value of assets increase which causes a rise in spending
what is the current inflation rate?
0.7
define inflation
there is an increase in average price level and a fall in purchasing power of money
what is fiscal drag?
when inflation causes people to be pulled into a higher tax band despite income not rising in real terms
what is an inflationary spiral?
inflation = demand for higher wages = creates more demand and cost on the business = more inflation
what are the drawbacks of cost push inflation?
- reduces growth
- increase unemployment
how does inflation benefit prices?
allows for stable price adjustment
- increase business confidence
- investment
- wage increase = more spending
how does inflation allow for economic growth?
- inflation is generally felt at a time of growth
- helps boost consumer demand and consumption
- causes growth
- right shift in AD
what is a drawback of inflation?
the type
- cost push
how does economic growth impact the budget deficit?
reduces it
- economic growth = more consumption
- more VAT
- more business profits
- more corporation tax
- less need for government spending as there will be high employment
what is an automatic stabeliser?
fiscal policy being used to influence the rate of growth and help counter the swing of the economic cycle
- in a period of high growth = high tax revenue/ less spending
what is required for increase in tax to reduce the budget deficit?
AUSTERITY
what is the current budget deficit?
£62.3 billion
