Inflation Flashcards
What are the 6 costs of inflation ?
Menu costs
Shoe leather costs
Redistributive costs
Psychological costs
International competitiveness
Wider economic costs
Menu costs
Costs of updating things with price information
Eg petrol
International competitiveness
Risings prices may mean countries goods become expensive reducing exports
Psychological costs
Inflation may make people feel worse off even if real incomes remain constant
Redistributive costs
Inflation erodes value of money / debt
Reduces real Interest rates which means savers made worse off while borrowers are made better off
Shoe leather costs
This once might have included more trips to the bank
This it more likely to mean time spent checking changes prices
Wage price spiral
Workers standard of living drops due to inflation
They negotiate a pay rise to be able to afford more goods and services
Firms have to pay more for labour and so their total costs rise
Firms raise prices to maintain healthy profit margins ,which causes inflation
Meaning workers standard of living drops
Wider economic costs
Uncertainty over future prices makes it difficult to make long- term and sign long term contacts this saps ( weakens) business and consumer confidence
Reducing AD and causing unemployment
The three benefits of inflation
Relative price can adjust
Difficulties in accurately measuring inflation may mean targeting zero inflation this may mean that zero inflation is taking place
Firms can overcome problems of prices, being sticky downwards workers find it difficult to fight real- terms wages
