Price Stability (3.4) Flashcards
What i the cost of living
The price level of goods and services bought by a household
What is inflation
A sustained rise in the general price level over time
What is price stability
When the price level stays constant over time or grows at an acceptably low rate
What is the rate of inflation
The percentage rise in the general price level over time
What is a nominal value
The value of something expressed as a monetary amount
What is a real value
ReAl values take inflation into account
What is consumer price index CPI
Method used to calculate the rate of inflation
What is demand pull inflation
When the demand in an economy rises and supply of goods and services does not increase to match the increase of demand so the price level is pulled up
What is cost push inflation
When the cost of production increases leading to a rise in the price level
What are the consequences of inflation for consumers
– Loss of consumer confidence: when prices are stable consumers know the relative prices of goods and service .if there is inflation the value of that money changes making them less confident
– Shoe leather costs: as price change more often consumers have to spend more time shopping around
-Real income may fall: the nominal income will stay the same but the real income will fall
-debtors gain
-savers loose
What are the consequences of inflation for producers
– Menu costs: firms have to change their pricelists more often ,this costs money to change menus for example
- unemployment: inflation makes the UK economy less competitive leading to unemployment
what is the cost of living
the price level of goods and services bought
what is inflation
a sustained rise in the general price level over time
what is price stability
when the general price level stays constant or grows at an acceptably low rate
what is rate of inflation
the percentage rise in the general price level over time
what is a real value
value taking inflation into account- refers to the goods and services that can be bought with that value
what is a nominal value
a value as a monetary amount
what is consumer price index (CPI)
the method used to calculate the rate of inflation
what is demand-pull inflation
when the total demand in an economy rises and the supply of goods and services does not rise to match the new demand causing the price level to be pulled up
what is cost-push inflation
caused when cost of production increases and as a result the price level will rise
what is a wage-price spiral
a circle process in which wage increases cause price increases which in turn cause wage increases
consequences inflation for consumers
- loss in consumer confidence : if the price level isnt stable then consumers loose confidence in what they can and cant afford
- shoe leather costs : as the price level changes more often people spend more time looking around for the best offer
- real incomes may fall
- consumers who are debtors gain : as real value of debt falls
- savers lose : real value of their savings fall
what are the consequences of inflation for producers
- menu costs : firms have to adjust there prices more often and this costs money to reprint
- labour market conflicts : trade unions will be aware of the inflation meaning they will want wages to rise as to keep their workers real wage the same. Also they then may ask for even more pay rises to prepare for future inflation
- unemployment : inflation makes the market less competitive
- producers lose as creditors : creditors like banks who are owed money , the real value of the money they are payed back will have fallen due to inflation
- producers also lose confidence and are less likely to invest
what are the consequences of inflation for the government
- government gains as debtors
- government has to spend more money on benefits
- -government spends more as a major employer : as wages rise they have to pay more for example NHS
- government receives more as tax
