Y12 Booklet 3: Inflation Flashcards
What is inflation?
a sustained increase in general price levels
What is deflation?
a sustained decrease in general price levels
What is disinflation?
a fall in the rate of inflation
(still inflating, but slower than prev.)
What is core inflation?
when inflation is measured without the most volatile prices (e.g. food, petrol, energy)
What is hyperinflation?
very high and rapid inflation
What is anticipated inflation?
inflation which economic agents expect and factor into their decisions (e.g. wage demands, MPC)
What is unanticipated inflation?
inflation which is higher than economic agents’ expectations
How is inflation measured in the UK?
CPI (Consumer Price Index)
How does Consumer Price Index work?
1) household spending patterns are monitored over 1 month
2) a yearly “basket” of over 700 goods, which represent the most popular household goods of each year, is created
3) highest spending goods assigned higher weighting, and vice versa
4) inflation is tracked monthly for basket goods, rate of inflation calculated from % change in CPI
Who benefits from inflation? Who is hurt the most?
+ those in debt, becomes easier to pay off
– those on fixed incomes, e.g. pensions & benefits
What are the 2 types of inflation?
- demand-pull inflation
- cost-push inflation
What are 4 sources of Demand-Pull inflation?
- (C) increased incomes
- (I) falling interest rates
- (G) increased govt. spending
- (X) increased exports
What are 4 sources of Cost-Push inflation?
- (W) rising wages
- (IT) increased indirect taxes
- (E) rising energy costs
- (RMP) rising raw material prices
Which curve does inflation shift on a diagram?
SRAS
How can inflation be shown on a diagram?
(D-pull vs C-push)
How can firms react to cost-push inflation, to stop face-value prices of products rising?
shrinkflation
reducing the size of products, whilst keeping the original price
What is the wage-price spiral? What does it criticise?
1) inflation, worker standard of living falls
2) workers negotiate pay rise to maintain standard of living
3) wages rise, costs of prod. rise, firms lose profits
4) firms raise prices to maintain profits, causes cost-push inflation
AD growth policies
What does negotiating wage increases rely on? What makes up this?
bargaining power
- trade union power
- scarcity of labour
What is a price shock? What can they cause?
a sudden increase/decrease in price
inflation
How can price shocks be categorised?
internal (domestic) vs external (foreign)
demand-side vs supply-side
What are the costs of inflation?
- menu costs
- shoe-leather costs
- psychological costs
- international competition
- wider economic costs
- redistributive costs
What are “menu costs”?
cost of updating pricing information (e.g. signs, websites, menus)
What are “shoe-leather costs”?
cost of time spent checking price changes and shopping around
What are “redistributive costs”?
inflation erodes the value of debts and interest, so:
- savers become worse off
- borrowers become better off
How does inflation affect “international competition”?
different inflation rates in different countries may make certain trade more expensive/cheaper, affects trade
What are the benefits of inflation?
- allows relative prices to readjust (price mechanism)
- reduces risk of deflation
- allows firms to overcome “sticky-downward” wages
What are the 2 types of deflation?
- benign
- malign
What causes benign deflation? Diagram? What are the consequences?
1) costs of prod. fall
2) prices fall
3) real incomes rise
promotes economic growth
What causes malign deflation? Diagram? What are the consequences?
1) AD falls
2) RNO and income falls
3) economic agents postpone purchases
AD falls more
How does benign deflation impact macroeconomic objectives?
C - improves current account balance (less infl = more intl. competitive) ✓
U - reduces unemployment ✓
P - reduces GPL ✓
S - (SR) economic growth ✓
How does malign deflation impact macroeconomic objectives?
C - improves current account balance (fall in income = fall in imports) ✓
U - increase unemployment (cyclical) ✗
P - reduces GPL ✓
S - fall in SREG ✗
