Discuss the main causes of inflation(25 marks) Flashcards
What is the intro for the question discuss the main causes of inflation?
Define inflation
Uk and BOE consider low inflation and stable inflation (up to 2% p/a) acceptable
What are 3 main causes of inflation?
Explansionary fiscal policy
Cost push inflation
Increase in money supply
What does the Expansionary fiscal policy involve?
decreasing tax rate and increasing government spending.
What is the evaluation for expansionary fiscal policy?
Uncertainity. Inflation is bad because it affects price and costs of a firm, making it very difficult to plan for the future.
What is evaluation squared for expansionary fiscal policy for why inflation occurs?
The extent of this depends on how much stock firms hold for the future.
What does cost push inflation involve?
Cost push inflation ( if the government puts an indirect tax on goods, if the good is Inelastic, must of the good gets passed on to the consumer.
What is evaluation on the indirect tax?
This is bad because people on fixed incomes lose out
What is evaluation squared for the indirect tax?
Depends on the level of govt welfare provided ( adjusted to inflation ( triple lock)
What does the money supply involve?
The amount of money in the economy is not matched by the output of goods and services ( too much money chasing to few goods. E.g. when interest rates are low, consumer spending increases.
How is the money supply linked to Fisher equation of exchange?
MV=PT M = MS v = Velocity of circulation ( the amount of times a unit of currency is used. P = Average prices and T = Number of transactions
What is the evaluation for the money supply?
This will mean a loss of international competitiveness. If we assume there is no or low inflation in other countries. Exports are expensive and imports cheaper.
What is evaluation squared for the money supply?
Depends on the Ped of the exports
