price level Flashcards
absolute price
market price (price of a prod. in money terms)
relative price
ratio between prices of goods / price relative to that of another good
general price level
avg of absolute price of all g&s
inflation , deflation
continuos rise/fall in the general price lvl
(caused by changes in AD)
Disinflation. when does it occur. due to what
- decrease in the value/rate of inflation
- occurs when the increase in consumer price lvl slows down
*takes place during a recession
impact of deflation (6)
lvl of production falls
bad for economic growth
unemployment increases
savings increase (ppl wont spend)
creditors :) , debtors :(
purchasing pwr of money increases
types of inflation
demand pull (AD rises)
cost push (AS falls)
demand pull inflation. what is it? the two approaches?
when savings < output
1.Qty theory of money
2. Keynesian theory
Qty theory of money, equation
there is a direct (equal) relationship between price lvl and money supply / stock of money
MV = PY
based on the equation of exchange
equation of exchange
the fisher equation
MV = PT
equation of exchange to the Qty theory of money
no. of transaction (T) = real GDP, <– physical value of output in the economy
MV = PY
*assuming ; velocity and real output is constant
nominal national income vs real GDP
PY - nominal
Y - real
( p = general price lvl)
factors which determine velocity of circulation
- the way households recieve money and make purchases ( monthly vs weekly – longer periods leads to a fall in circulation)
- use of money substitutes ( increased use leads to fall in money circulation)
Keynesian theory
after reaching macro economic equilibrium, if AD increases, Price lvl increases ( supply of g&s cannot be increased)
if AD increases more that full employment, price lvl increases leading to demand pull inflation
look at book for graph
