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Economics AS (Macroeconomics) > Inflation > Flashcards

Flashcards in Inflation Deck (15):

Define Inflation?

A general and persistent rise in the price level


Define inflation rate?

A general and persistent rise in the price level, measured as a percentage.


Consequences of inflation?

-Reduction in purchasing power if income does not increase at the same rate as the rate of inflation,
-Savings fall in value.
-Negative effect on international competitiveness, more expensive items are harder to sell.
-Lack of confidence. Households and firms are anxious about the economic situation so cancel or postpone purchases.
-Fiscal Drag. The higher the income, the higher the rate of tax.
-Shoe leather costs: The time spent looking for cheaper alternatives and the time spend searching for better interest rates.
-Menu costs: The cost of changing prices.


Benefits of inflation?

-Money illusions: Employers can give nominal pay rises equal to the inflation rate which makes employees think that they are richer.
-Protects from deflation.
-Erodes the value of debt.


What are the two ways of measuring inflation?

CPI (consumer price index) and RPI (retail price index)


How to calculate CPI?

Use the annual publication of "living costs and food survey" to identify a typical expenditure for UK households. Then you select 600 products which fit this pattern, and you assign weights to each item.


What are the differences between RPI and CPI?

-RPI contains housing costs, CPI doesn't.
-They weight products differently.
-RPI uses arithmetic mean whereas CPI uses geometric mean.
-RPI is usually higher than CPI
-RPI includes mortgage interest rates as an item.


Limitations of measuring inflation?

-Some groups like pensioners may not follow the typical average weighting of RPI and CPI.
-Price rises fail to indicate improvements in quality of existing goods.


What are the three causes of inflation?

-Rise in demand but less or no rise in supply.
-Rise in cost of production.
-Increase in money supply.


What is pull inflation?

Rise in demand, but less or no rise in supply


What is push inflation?

rise in the cost of production.


Define demand-pull inflation?

Demand-pull inflation is when demand rises but supply is inadequate to meet that demand.


What are some solutions to demand pull inflation?

-First come first serve
-increase the price (those who most value it will get it)


What is cost push inflation?

When a rise in the cost of production is passed onto the consumer


Why is there inflation as a result in rise in money supply?

E (expenditure) = O (output) = Y (income)
The value of all output must be equal to all the money spent to buy it in an economy. All the money spent to buy it= money supply. If the money supply rises but output doesn't then inflation will occur.