C10 Price Stability Flashcards
(18 cards)
Inflation
economy faces sustained ↑ the GPL of GS
Annual inflation rate of current year
CPI current year - CPI preceeding year /CPI preceding year x100%
CPI
Consumer price index: Index showing avg price of representive typical GS bought by majority of household
Mild inflation
2-3%
- maintain purchasing power of income
- p stability boost firms confidence due to ↑ certainty of profits = ecnousge investors = ↑ I = ↑ purchasing power = ↑ I = ↑ growth = ↑ EM
Hyperinflation
3 digit
- lose confidence and resort to barter trade
Demand pull inflation
cause by ↑AD that is operating near full EM or at full EM
What is demand pull inflation
- ↑ AD (CIGX-M)
- ↑ GPL
- if near full EM = harder for firms to ↑ output for GS due to shortage of resources/ resouces become increasingly scarce.
- The shortage cause firms turn to inefficient ways of production
- COP of additional unit output ↑ = ↑ prices must be offered for producers to ↑ production
- Excess demand = even greater ↑ in GPL
AT FULL EM
1. there is no idle rescues, any ↑AD = significant ↑ GPL WIHTOUT CORRESSPONDING IN RNO, economy will overheat
Cost pull inflation
Caused by ↑ COP such as ↑ wages, FOP
What is cost push inflation
Imported inflation (external)
1. ↑ COP due to ↑ imported intermediate goods
- could be due to depreciation of local currency which ↑domestic price of imports
- could be inflation In other countries = ↑ price of imported GS
- Wage push in inflation (internal)
- ↑ trade unions = ↑ wages that exceed ↑ in labor productivity = firms ↑COP = ↑ prices of GS passed on to households
positive consequences of inflation
- Economic growth and EM
- ↑ AD = ↑ inflation
- mild levels of inflation = ↑ incentivize profit maximizing producers to ↑ production
- ↑ price = firms expect profits to rise in the future = ↑ business optimism = ↑ I = ↑AD = depletion of stocks = firms ↑ production = multipled ↑ in real GDP = actual growth = DD derived for labor ↑. = decrease in DD deficient UNEM
in the long run, investment exp = accumulation of capital stock = QTY capital stock ↑ = PRODUCTIE CAPACITY ↑ = LRAS ↑
negative consequences of inflation (internal)
- Economic growth and EM
- due to cost push / high inflation
COST PUSH
- ↑ COP across economy = ↓ production = profit ↓ = ↓ real GDP = ↓ actual economic growth
- Server inflation = uncertainty about the future = ↓ make accurate projection on future prices = ↓ business optimism = ↓ I = ↓ AD = multiplied ↓ in real GDP = ↓ actual growth . ↓ I = ↓ QTY of capital goods = ↓productive capacity in the long run = ↓ potential growth
- Inflation erodes the value of money. If nominal interests rates paid on savings < rate of inflation esp during server inflation. People will not having incentive to save = ↓ savings = ↓funds avail for future potential growth
- [Inefficient allocation of resource]s due to shoe leather cost and menu cost
- Serve inflation, time and effort ppl take to minimize the effects on inflation on the eroding purchasing power of money and other financial assets rather than on more productive and value generating activities
- menu costs, extra cost to firms of changing price info eg price labels catalogues which ↓ profits as they ↑ COP
-
People likely to lose out during inflation
- PG A69
People likely to gain during inflation
PG A69
negative consequences of inflation (external)
- Impacts on net exports
- When price lvl in A ↑ more rapidly that price lvl in other countries with which it trades, X ↑ expensive to foreign buyers while M cheaper to domestic buyers. THE COUNTRY’S INTERNATIONAL COMPETITIVENESS is reduced
- ↓ DD in A’s X as consumers from rest of the world tue to cheaper substitutes from other countries
A’s dd for M will INCREASE due to its local substituting away from domestic goods + IMPORT EXPD INCREASE. ↓ in export earnings and rise in import expo = worsen X-M [WORSEN TRADE DEFICIT] - ↓FDI due to ↑ COP = ↑ uncertainty = ↓ business optimism = ↓ I = local and FDI move out of country = ↓ capital stocks = ↓ potential growth
- Destabilize exchange rate
- inflation in domestic high = reduce foreign demand for exports due to loss of its export price competitiveness = fall in demand for its currency by foreigners
greater demand for imports = increase in supply for domestic currency t buy foreign currency to buy of its imports. Fall in demand for county;s currency and increase in supply of currency = suppus of domestic currency = depreciate aghast foren currency
A71
Deflation
Economy faces sustained decrease in GPL of GS
- -ve inflation = decline CPI
What is deflection caused by
- Persistant ↓ AD due to ↓ C or ↓ I due to pessims in the future
- ↓ AD = surplus of GS, firms faced increase qty of unsold stocks which force the to lower prices to clear stocks excess - ↑AS
- ↓ COP = surplus + downward pressure
- ↑ productive capacity due to tech = expansion of capacity = surplus
Consequence of deflation
- high levels UNEM
- ↓ consumer spending
- ↓ consumer confidence
- ↓ business profits, ↓ revenue, cutting cost - ↓ investment and economic growth
- Debt + borrowing
- deflation = real interest rate increase = real cost of borrowing rise = weaken AD further due to ↓ C AND ↓ I = downward pressure on price
- Value of debt increase. Due to falling prices purchasing power of money increase, however normnal debt is constant = real value of debt increases = burden borrowers A76
real interest rate% = normal IR % - rate inflation %
STAGNATION
Period of rising prices with little to no growth in real output
increase AD + decrease in AS => sharp increase in GPL + decrease RNO & EM
A77
