chapter 9 - inflation Flashcards
1
Q
causes
A
demand pull inflation
cost push inflation
2
Q
demand pull
(draw graph)
A
rise in general price lvl resulting from excess of total spending
inc in AD can be brought about by increases in C,I,G or (X-M)
inc in general price lvl
3
Q
cost push
(draw graph)
A
increase in cost of production
causes AS curve to shift left, resulting in inflation
- normal inc in prices of factors of prod
- weakening of country’s exchange rate
4
Q
CPI
A
(cost of market basket, cy/cost of market basket, by) x 100
5
Q
inflation rate
A
inflation rate = (CPI current year - CPI previous year)/CPI previous year x 100%
6
Q
consequences of inflation
A
penalises
benefits
7
Q
inflation penalises
A
- fixed income earners (money income of these poeple is constant, when prices inc their real income falls)
- savers (if the int earned is less than inflation rate)
- creditors (lose bc they did not anticipate inflation rate and charged a lower int rate on their loans)
8
Q
inflation benefits
A
- debtors (money that was first borrowed had a certain amount of purchasing power, but where here is inflaiton, the loan that they repay is now of lesser value than when they first borrowed it)
- flexible income earners (people whose income are ndexed to the inflation rate)
9
Q
limitations of CPI
A
- doesnt consider substitution
quantity is held constant at the BY lvl –> even when prices chane, consumers are assumed to buy the same amt of goods as before. (consumers do change the qty of a good they buy) –> therefore tends to overstate the inflation rate - doesnt consider qualitative improvement
when there is higher quality, price inc –> tends to overstate inflation - not a total representative measure
changes are based on a typical basket of goods purchased. in reality, actual bundle of goods purchased by consumers need not match the basket used in calculating the CPI
