Inflation Flashcards
(20 cards)
What is the definition of inflation
A sustained rise in an economies general price level
How is UK inflation measured?
Consumer Price Index (CPI)
What are the limitations of CPI
-not fully representative
-spending patterns change
What is the definition of hyper inflation
A phase of extremely rapid inflation nearly always the result of mass money printing with money as an asset ending up worthless
What is deflation
When prices are falling,CPI is negative
What is disinflation
A fall in the rate of inflation but not sufficient to bring about deflation,e.g annual inflation rate drops from 7% to 2%
What is meant by stagflation
Refers to an unfortunate and costly combination of stagnant economic growth,rising unemployment and high inflation
What are the 3 main causes of inflation
1)cost push inflation
2)demand pull inflation
3)government printing more money
What is cost push inflation
-rising wage cost in labour market
-increasing raw mat and component cost
What is demand pull inflation
-often linked with money/credit boom
-economy close to full capacity(in elastic AS)
-positive output gap
How does the government printing more money cause inflation?
-changes in regulated prices
-changes in indirect taxes and subsidies
what is the target rate of inflation in the UK
2%(+/-1%)
what is the main monetary policy tool the bank of England uses to control inflation
interest rates/bank rates
what are interest rates
the reward of saving money and cost of borrowing money
how do interest rates affect inflation
if interest rates increase GPL will fall this is because people will have less to spend, demand falls and demand pull inflation decrease, vice-versa
which economic agent decides the target rate of inflation
The central bank
How is CPI carried out
1)family expenditure survey
2)A ‘consumer basket’ of most popular goods and services is formed Wirth average prices attached
3)prices of goods and services are weighted based on % of income/importance
(0-1)e.g 10% of income =0.1
4)weighted prices are added to give total weighted price of basket
What is the money supply
All the currency and other liquid instruments in a country’s economy on the date measured
What would be the affect on inflation if exchange rates fell (imports)
-Imports become more expensive leading to higher costs for firms therefore cost push inflation
What would be the affect on inflation if exchange rates fell (exports)
Exports become cheaper for foreign buyers leading to an increased in exports and decrease in imports due to high costs so demand switches to domestic, therefore net exports increase AD shifts to the right then demand pull inflation.
