Th2.1: Effects of Inflation Flashcards
What will happen if people’s income do not rise with inflation?
they will have to spend less, which could cause a fall in living standards
Who will lose out if there is inflation?
consumers who have saved as their money is worth less
What are the psychological effects of inflation on consumers?
because prices are rising, they may feel less well-off, even if their income is increasing with inflation, therefore they may decrease their spending
Why is inflation good for people in debt?
they will be able to pay it off at a price which is of cheaper value
What happens to British goods if inflation in Britain is higher than in other countries?
they will become less competitive and be more expensive, leading them to be more difficult to export - affecting balance of payments
Why is deflation bad in terms of purchases?
it encourages people to postpone their purchases as they wait for prices to fall further
How does deflation affect firms?
people will be more likely to save their money, leading to a fall in firms’ profit and in business confidence, leading to long term reluctance to invest
Why cannot firms plan for the future regarding inflation/deflation/disinflation?
it is difficult to predict
What will firms have to change following effects of changing prices and why is this bad?
the prices for their goods on menus and labels e.t.c which can be expensive
What happens if the government fails to change excise taxes in line with inflation?
(excise taxes - taxes set at an amount e.g £1)
real government revenue will fall
What will happen if the government fail to charge personal income tax allowances (the amount a worker can earn tax free)?
real government income will increase and taxpayers will have less money
What will happen if workers do not receive yearly pay rises of the rate of inflation?
they will be worse off and their standard of living will decrease
Why do those in weaker unions tend to be most affected by inflation?
they are unable to win wage rises in line with inflation
Why could deflation cause some staff to lose their jobs?
there is a lack of demand meaning firms see a fall in profit and have to decrease staff to cut costs
How can costs be reduced if inflation is anticipated?
through indexation, so wages or taxes are increased in line with inflation
