Price Stability Flashcards
Inflation
Sustained increase in economy’s price level over a period of time
2 causes of inflation
- Demand-pull
- Cost-push
cost-push inflation
rise of price due increase cost of FOP -transportation, war, diseases
increase experience worker salary, increase AD, price level increases, worker demand more salary.
demand-pull inflation
consumer bid for higher price on limited resources
2 types of inflation
- creeping inflation
- hyper inflation
+ve aspects of inflation
if the price increases but the cost stagnant
1. firm rich, open more branches and higher more employer
2. consumer get jobs and unemployment decreases
3. tax increase and government have more money
deflation
sustained fall in price level
disinflation
a fall in inflation rate
why deflation can be bad?
Can lead to speculation of consumer to think that the price will continue to fall down and restrain themselves from buying
calculate inflation rate
Change in index price/previous year index x 100
if the value of the inflation rate is negative..
it’s deflation
Why we need to be careful when selecting base year to calculate CPI?
eg. 2020 - COVID-19 occurs when inflation is very high, it will give the impression that deflation occurs the following year
Why carrying survey is difficult for calculating CPI?
different region has different spending pattern and different standard of living. It is hard to find the overall price level.
the weightage for different item is different. Weightage for vegetables in a region where most of the population are vegetarian.
What is real data?
the data is adjusted with inflation
What does the monetarist say about the money supply?
Support the supplier - The key to high AD is the oversupply of money
What do Keynesians say about the money supply
Support the consumer -They believed the cause of inflation was the rise in costs, which caused firms to borrow more money from banks, thus increasing the quantity of money.
Possible cost of exports
Reduction of net export - the country that experiences inflation will be harder to export because
The consumer will also consume more import products
Menu cost
Need to change price tag, change billboard, ect making the firm unpopular due to constant change in price
What happens to lenders and borrowers during inflation?
Lender wins (gains more money), borrower loses (lose more money)
Shoe leather cost
Cost of money involved in moving from one financial institution to another in search for higher interest rate
Why don’t investors want to invest in an economy of unanticipated inflation?
When the interest rates are uncertain, the investor isn’t sure whether profit can be made or not
Inflationary noise
Consumers and firms become confused regarding the price changes of other items. The rise of prices of some items leads to people believe that inflation is increasing
GDP can either increase by increase in AD or AS, which one investor prefer?
Investor prefers to invest in country with high AD, price is increasing, so they can generate more profit
What is recession?
2 consecutive fall in GDP
Why does a recession occur?
What is the role of trade union?
fight for better wages
Can an increase in trade union power cause inflation?
Yes, salary increase and cost of production increases, AD shift right, AS shift left
What happens if the interest rate is lower than the inflation rate?
- The borrower will gain because the value of the money they are repaying is less than the value they initially borrow
- The saver will lose
Is low unemployment always good?
Depends, sometime the unemployment is low, but the wage rate is low
Why does the government want to decrease the unemployment rate?
- The tax revenue will increase
- Higher output
- low expenditure on unemployment benefits
