Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

A Level Economics: Macroeconomics > 11.3 Inflation And Deflation > Flashcards

11.3 Inflation And Deflation Flashcards

(69 cards)

Start Studying
1
Q

What is inflation?

A

A persistent or continuous rise in price level or as the continuing fall in price level the value of money to rise

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What was the rate of inflation in 1980?

A

20%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What was the inflation rate in 1990?

A

10%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What does deflationary policy involve?

A

Fiscal or monetary policy to reduce aggregate demand and levels of economic activity,output and unemployment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are the two types of inflation

A

Cost push
Demand pull

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is demand-pull inflation?

A

(Demand inflation)

A rising price level caused by an increase in AD shown by a shift of AD to the right

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is cost push inflation

A

( cost inflation)

A rising price level caused by an increase in the costs of production, shown by a shift in the SRAS curve to the left

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is demand pull inflation caused by

A

Increase in AD

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What does to the left of the LRAS curve mean?

A

Producing below the normal capacity of output

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What happens when the economy is initially producing the on the economies SRAS curve but below the normal capacity level of output?

A

The price level has to rise to persuade firms to produce more output to meet the extra demand

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What can lead to demand pull inflation?

A

An increase in any of the components of AD
-consumption
-investment
-government spending
-export deficit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Diagram for demand-pull inflation

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Describe how this diagram shows demand-pull inflation

A

-equilibrium national income is at point X
-the initial point of AD is AD1
-shift to AD2 causes price level to rise to p2
-real national income Increases to normal carport level of Yn

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What does this diagram imply

A

-economy producing below normal capacity level of output and then moving to a normal

  • capita of output

-following increase in AD equilibrium point becomes Z with economy on LRAS curve

-any shift past z results in demand pull inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What it be inflationary to increase AD from point V

A

Would increase output and employment and a little effect on inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is the cause of cost push inflation

A

Structural and institutional conditions on the supply side of the economy particularly in the labour market and the wage-bargaining process

(Wage-cost inflation)

-rising prices of energy/ commodities can also cause cost push inflation (import-cost inflation)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What do cost push theories generally argue?

A

The growth of monopoly power in the economy’s labour market and in its market for goods and services is responsible for inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Diagram for cost push inflation

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Describe how the diagram shows cost push inflation

A

X=equilibrium national Income
Real output=y1
Price level=p1

Money costs of production that firms incur rise because money wages or the price of imported raw materials rise, increases production costs and SRAS shifts left

Shift left cusses price level to rise to p2, the amount of output firms are willing to produce decreases to y2 from y1, new point of z

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

What is easier to fix cost push or demand pill

A

Demand pull

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What can be done to fix cost push inflation

A

Reduce inflation target
Reduce vat and subsides to firms

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Who are monetarists?

A

Economists who argue that a prior increases in the money supply is the caused of inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is monetarism?

A

Narrow monetarism centres on increases in the money supply as the prime cause of inflation. Broader monetarism focuses on the virtues of free markets in resource allocation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Free market economists are known as?

A

Monetarists

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Monetarists subscribe to the theory of ….
Demand-pull inflation but go a stage further by arguing that excess AD for output is caused by a prior increase in money supply
26
What is monetarist economic theory known as?
Monetarism
27
What theory lies at the heart of the monetarists theory of inflation?
The quantitive theory of money
28
What is the quantitative theory of money?
Oldest theory of inflation, states inflation is caused by a persistent increase in the supply of money
29
According to the quantity theory of money, what happens when expansion of money supply is greater than the increase in real national income?
Households and firms have excess money which when spent drive up the price level (too much money chasing too few goods)
30
What is the equation of exchange
Money supply(stock of money) x the velocity of three circulation of money= price level x quantity of output MV=PQ
31
What is the velocity of circulation?
Speed of which money circulated around the economy when people use money to buy goods
32
What does it mean when monetarists argue that v is constant or stable?
When M increases, it is spent on services, if Q is unable to increase the price level (P) is pulled up by excess demand
33
What do Keynesian economists believe when M increases?
It may be partially absorbed by a showdown in , which means the much of the extra money is not spent on customer goods and services The PQ on the right hand side of the equation can increase either because real output increases or the price level increases
34
What is the equation of exchange written as and what does T stand for?
MV=PT T stands for total transactions taking place in the economy -comes from American economist Irving Fisher
35
Why is PQ a better measure of PT for expenditure on national output?
Because total transactions include second-hand transactions as well as the exchange of new goods and services
36
What do Keynesian economists think about the quantity theory of money as an explanation of inflation
They reject it
37
What are the three main ways Keynesian economics have attacked the quantity theory
-the velocity of circulation is not constant -under-full employment equilibrium -reverse causation
38
Why do Keynesian Economists attack the quality theory of money with under-full employment equilibrium?
-if there is spare capacity and unemployment in the economy, an increase in the money supply may increase real outcome and output rather than the price level P -market forces are too weak and take too long to return the economy to its normal capacity output, the economy can get stuck in an under-full employment equilibrium
39
Why do Keynesian Economists attack the quality theory of money with the velocity of circulation is not constant?
-question wether the velocity of the circulation of money is constant(v represents how often money is spent) Monetarists believe that money earns little or no interest should spent it straight away Keynesian argue under certain circumstances (when share and bond prices are expected to fall) it it sensible to hold idle money balance
40
What is inflation?
Sustained rise in an economy’s general price level
41
What is hyperinflation?
Phase of extremely rapid inflation nearly always with he result of mass Monet printing by the government with money as an asset ending up as worthless
42
Why do Keynesian Economists attack the quality theory of money with reverse causation?
If a gov tightly restricts the growth of money to try and stem inflation, the main effect might be that the current level of transactions cannot be financed, so real activity will fall
43
Deflation
A sustained period when the vernal price level for goods and services is falling
44
Can people’s expectations of future inflation affect current inflation rates?
Yeah
45
Who was the leading Monetarist who found that people’s expectations of future inflation affect current inflation rates
Milton Friedman
46
What is disinflation
Fall in rate of inflation but not sufficient to bring about price inflation
47
How can future inflation expectations affect current inflation
Because people will react in an inflationary way now
48
Who benefits from inflation
Home owners Government (debt decreases)
49
What are the two theories of future expectations of inflation
Adaptive expectations Theory of rational expenses
50
What is creeping inflation
When inflation is low year on year and easy to predict
51
Why is a low but stable inflation rate important for labour markets to run efficiently?
When prices are completely stable, to cut real wage rates nominal wage rates have to fall With 0 inflation the changes required in relative wage rates needed to make labour markets function efficiently fails to take place
52
What does inflation lead to(6)
-risk of wage inflation -falling real incomes -inequality (affects poorer people more) -higher cost of borrowing -business uncertainly -less business competitiveness
53
What are the effects of inflation?
-disproportionate effects -distortion of normal economic behaviour -breakdown of functions of money -reduced international uncompetitiveness
54
How does inflation have disproportionate effects?
Weaker social groups on fixed incomes lose out
55
How does inflation distort the normal economic behaviour?
Distorts consumer behaviour causes households to bring forward purchases if they expect the rate of infection to accelerate
56
How does inflation cause the breakdown in the functions of money?
Money becomes less useful and efficient as a medium of exchange and store of value
57
How does inflation lead to reduced international uncompetitiveness
When inflation is higher than in competitive countries exports increase in price ,putting pressure on fixed exchange rate Lower growth and rising unemployment are likely to result
58
Who benefits from inflation?
Workers with strong wage bargaining power Debtors if real interest rates are negative Producers if prices rise faster than costs
59
What is the triple lock?
Rate at which the pensioners incomes go up each year
60
What is extended deflation an issue?
When people believe prices are going to fall they postpone big spending decisions
61
Diagram for ‘good’ deflation
62
Diagram for ‘bad’ deflation
63
Describe this diagram (Good deflation)
Results in improvement in economies supply side reduces business cost and costs In production so price level falls but employment and output rises
64
Describe this diagram Bad inflation
Reduced AD has negative multiplier effects and possibly a credit crunch
65
How do changes In other countries affect UK inflation?
When times are good in world economy with rising demand for commodities UK imports inflation When times are bad the pressure on UK inflation is reduced
66
What does a fall in the pounds exchange rate to other currencies lead to
Cost-push inflation
67
Which two countries affect the the UK price level the most?
USA China
68
What is the final thing that can affect UK inflation rates
Supply and demand unforeseen shocks
69
What do the economic effects on inflation depend on?
-if high inflation is temporary or persistent -wage bargaining power of workers in different industries -whether nominal interest rates on savings and loans keep pace with inflation -does uncertainty lead to a fall in domestic and foreign inward investment -extent to which a central bank is prepared to tolerate inflation without raising interest rates

A Level Economics: Macroeconomics (25 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions