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Inflation

QuestionAnswer
What is inflation? Inflation is the persistent increase in the general price level of goods /services in an economy over a certain time period
What happens as a result of the general price level increasing? Each unit of currency buys fewer goods/services - inflation reflects a reduction in purchasing power. A loss of real value in the medium of exchange and unit of account within the economy
What is hyper inflation? High inflation, defined as about 50% per month
What are the measures of inflation? 1. the inflation rate - the annual % increase in prices 2. UK government published a CPI each month (the rate of inflation is the % increase in the index over the previous 12 months
How is the rate of inflation calculated? ((CPI yr 2 - CPI yr 1) / yr1 ) x 100
What is the GDP deflator calculation? (Nominal GDP/Real GDP) x 100
What are the costs of inflation? 1. redistribution - redistributes income from those on fixed incomes and wealth of those with assets 2. uncertainty for the business community. difficult to predict the costs and revenue 3. balance of payments 4. resources used to cope with inflation
What are the two types of inflation? 1. Demand pull inflation 2. Cost push inflation
What is demand pull inflation? Caused by the continuous rise in AD. AD curve shifts to the RIGHT. Firms will respond to a rise in demand by partly increasing prices and partly increasing output.
What is cost push inflation? Associated continuing rising costs. Causes the AS curve to shift LEFT. Shift occurs when cost of production rises independently of AD. If firms face a constant rise in costs they will respond by partly increasing prices and passing costs to consumers and
Interaction between demand pull and cost push? Demand Pull and Cost Push can occur together. Wage and price rises can be caused by increase in AD and by independent causes pushing costs up. Cost push may encourage gov to expand AD and offset unemployment.
X 2 policies to tackle inflation? 1. Fiscal policy 2. Monetary Policy
What is the aim of supply side policies? To reduce the rate of increasing costs and help reduce leftward shift of the supply curve.
Which two ways does supply side policy help to reduce left ward shift of the supply curve? 1. restraining monopoly influences on price and incomes 2. by designing polices to increase productivity
Created by: Joph
 

 



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