Topic 3 - Inflation and Deflation Flashcards
What is inflation
The inrease in average prices of goods and services over a period of time
What is deflation
The decrease in average prices of goods and services over time
What are the types of deflation
Benign and Malovelent
What is benign delfation
Deflation caused by cheaper costs of production
What is malevolent deflation
The fall in demand, making prices drop too
What are the consequences of inflation(4)
Impacts international competitiveness
Fiscal drag
Effects on investment
Affects income
How does inflation affect international comp
As the cost of production in a economy is higher
What is fiscal drag
Where inflation causes workers wages to increase, potentially pushing them into higher tax brackets
How does inflation effect investment
As interest rates are higher (to control inflation ), therefore less will be spent and more saved
What is an inflationary pressure
Something that influences inflation
What is demand pull inflation
Infltion caused by an increase in demand
What is cost push inflation
Inflation cused by an increase in production costs
What are some consequences of deflation(4)
Consumers may hold back on savings, as they expect prices to drop futher
Debt increases
Cost of borrowing increases - if interest rates arent changed
Lower profit margins
Fall in assets value and prices
What are policies to control deflation(6)
Lower interest rates
Cheaper loans
Inc credit availablity
Devaluation
Fiscal stimulus measures
Higher gov spending
Lower direct taxes
How is deflation and inflation measured
Via RPI and CPI
What is CPI
Consumer price index
What is RPI
Retail price index
What method does CPI use
A basket of goods approach
Where does the data for the basket of goods method used in CPI come from
The family expenditure survey
Is CPI a weighted price index
Yes
What is a weighted price index
Where products/markets are given a weighting in the economy respective to how much money is spent on them
How is weighted price index calculated
Weighting x Price index
What are some criticisms of CPI(4)
Not fully representative
Doesn’t show spending patterns or reasons
Does account for quality changes
It is slow to react to new products .
Does CPi include house prices and related areas
No, but RPI does
What is the quantative theory of money
The link between money and general price level
How is the quantative theory of money calculated
Money x Circulation of money = Price level x Output/GDP
Benefits of low inflation
Stability in the economy as firms can predict future costs and prices
Firms may increase production as demand for products are always gonna be there, even with higher prices
Encourages spending as there is no worry the value of money will fall
Prevents booms and bust cycles
Encourages spending, as no speculation wether prices will fall
Increases value of asset prices (good for those who have saved), e.g. A house was worth 50000 20years ago but now is worth 200000
