Unit 15 - Inflation

Question 1

Define inflation

Answer 1

An increase in general price level within an economic. It is neutrao and continuous. Not a once off thing.

For people with fixed nominal income like pensioners, higher inflation means lower value of income.

High inflation makes it hard fir producers to distinguish between increasing relative prices and infkation.

Question 2

Explain zero inflation

Answer 2

A constant price level from year to year

Question 3

Explain deflation and what’s wrong with it.

Answer 3

A decrease in general price level.

When prices are falling, household will cut consumption in expectation of the prices to continue falling, this is like a negative shock in aggregate demand.

Deflation also in reases real debt burden, which leads ti further cuts in consumption as households try to return ti theur target wealth.

Question 4

Disinflation

Answer 4

A decrease in the rate of i flation

Question 5

What is the fischer eqn?

Answer 5

Real interest rate = nominal interest rate - inflation rate

Question 6

What causes inflation

Answer 6

Increase in bargaining power of firms over consumers, lowere comp means higher prices,

Increase in bargaining power over firms.
Wage setting curve rises and employment rises.

Question 7

Explain the philips curve

Answer 7

Inflation (y)

And unemployment (x)

Downward sloping curve, states that with an increase in economic growth comes inflation and thus higher inflation means lower unemployment.

Question 8

What is the bargaining gap?

Answer 8

Difference between real wage required to incentivise effort and the real wage that gives firms enough profit to stay i. Business

Unemployment below equilibrium = positive bargaining gap and inflation

Unemployment above equilibrium = negative bargaining gap and deflation