Inflation Flashcards
(40 cards)
Define Inflation.
Inflation is the sustained rise in the general price level in the economy and a fall in purchasing power of money over a period of time.
or,
It refers to rise in average price level of most of goods and services in the economy.
What is Demand Pull Inflation?
This type of inflation is caused by increase in demand and when demand outgrows the supply in the economy.
“TOO MUCH MONEY, CHASING TOO FEW GOODS”
What are the reasons for Demand Pull Inflation?
- Increase in government expenditure
- Rising Population
- Black Money
- Changing Consumption Patterns
- Increased Wages
What is Cost Push Inflation?
It is also known as Supply Shock Inflation.
It occurs due to reduced supplies because of increased prices of inputs.
What are the reasons for Supply Shock Inflation?
- Increase in cost of Factors of Production
a). Rise in wages (At times, rise in wages if greater than rise in productivity, increases the costs therefore increasing the prices too)
b). Poor Quality of workforce
c). Rise in cost of capital - Increase in Indirect Taxes
- Infrastructural Bottlenecks
- Fluctuation due to seasonal and cyclical reasons
- Lower availability of raw materials
- Poor Business environment (Eg: High cost of compliance with laws)
- Vulnerability to disasters
What is Structural Inflation?
It is also known as Bottleneck Inflation.
This inflation is built in the economics due to government policies or faulty supply chain.
Inflation in India is largely due to structural factors.
What are some factors affecting both Aggregate Supply and Aggregate Demand, thus impacting Inflation?
- Legal Factors
a). Hoarding
b). Cartelization - International Factors
a). Geopolitical Tensions (sanctions, wars etc)
b). Risks in countries of import
- Political Risks
- Labour Strikes
- Natural Disasters
- Robberies in sea routes etc
c). Rise in price of international commodities such as edible oil, crude oil etc.
What is Cartelization?
A CARTEL is an organization created from a formal agreement between a group of producers of goods and services to control supply or to regulate or manipulate the prices.
Eg: Drug cartels, Cement Cartels (in India) etc
In what ways India deals with Cartelization?
Competition Commission of India
What do you mean by Stagflation?
Stagflation refers to the combination of high inflation and low growth.
It is also described as the situation of high inflation and high unemployment.
What is the difference between, “Deflation” and “Disinflation”?
A. Deflation: Completely opposite of Inflation
- It occurs when the inflation rate falls below 0% and enters in negative territory.
B. Disinflation: Slowdown in the rate of inflation
- It occurs when inflation rate is declining but remain in positive trajectory.
What is meant by Recession?
Recession is a situation characterized by negative growth rate of GDP in two successive quarters.
What is Depression?
Depression is the extreme form of Recession.
A 10% decline in GDP is generally called Depression.
What are some indicators of Depression in the economy?
- Huge fall in demand and consumption of goods and services
- Shattering of Business confidence
- A sharp decline in the output of the economy and investments
What is Inflation Spiral?
It is the positive feedback loop mechanism of wages and prices i.e., “Wages press prices up and prices pull wages up”. Thus, it is also known as, Wage Price Spiral
Why is Inflation known as self-fulfilling prophecy?
When people expect prices to rise, their current decision may be to buy and stock up the goods. This results in artificial scarcity and thus an increase in prices. Thus, Inflation is a self-fulfilling prophecy.
What is Skewflation?
Inflation attributed to a rise in prices of just a few goods in the headline basket i.e., a handful of goods become expensive, pulling up the rate of inflation.
What is Core Inflation?
The % change in price of the headline basket after removing highly volatile goods (beyond the control of the authority)
What does Philips Curve represent?
It shows the relation between Prices and Unemployment over a period of time.
There is generally an inverse relation between them.
Stagflation is an exception to this relationship.
What is the effect of inflation on lenders and borrowers?
Lenders lose while Borrowers benefit from inflation.
How Lenders shield themselves from the negative effects of inflation?
- Charge a higher Nominal Interest Rate (NIR)
- Charge a fixed Real Interest Rate (RIR), therefore NIR would vary depending on the rate of inflation
What is Nominal Interest Rate and Real Interest Rate ?
NIR is the interest rate without adjusted for inflation.
RIR is the NIR adjusted with inflation.
RIR = NIR - Rate of Inflation
What is the effect of inflation on consumers?
Consumers loses out money as money loses its purchasing power with inflation.
How Producers are affected from Inflation?
Benefit of producers from inflation depend on,
1. Ability of producers to pass on the increased cost of factors of production to the consumers
2. The ability to set the prices
3. Nature of goods they are producing
Necessary goods - Inelastic Demand (more benefit)
Luxury goods - Generally less competition
