Inflation Flashcards
(25 cards)
What is inflation?
A fall in the purchasing power of money as a result of a general sustained increase in price level
What Is deflation?
A general, sustained fall in price level and an increase in purchasing power which is measured by a weighted basket of goods
What is disinflation?
A fall in the rate of inflation
What is hyperinflation?
An excessively, uncontrollable high rate of inflation
What is the policy objective of inflation?
Low and stable
What do you want low and stable inflation?
Provides price stability so business and consumer confidence increases
What is the problem with high and volatile inflation?
It distorts price signal so we can’t allocate scare resources efficiently, it distorts signal about purchasing power of income, leads to higher wage demand and cost push inflation
What are real values?
Values adjusted for inflation, at constant prices
What are nominal values?
Values not adjusted for inflation, at current prices
What are three ways to measure inflation?
> CPI,RPI and CPIH
What consumer price index?
Measure of general price levels, excludes housing costs and council tax used instead of RPI
What is CPIH ?
Measure of general price levels, cover cost associated owning, maintaining and living in a home, but doesn’t include mortgage interest payments used instead of CPI
What is PRI?
Way measure of inflation that is only longer the official rate of inflation, but the government still use it to index the state pension and as a cost escalator for government transfer payments and wage negotiations
How are CPI and RPI measured ?
They are constructed using the family expenditure survey- changes in prices of a basket of goods bought by the average family
What does the basket of goods work?
That data is weight to account for the relative importance of different items of expenditure and then used to construct a series of index numbers with a base of 100
What is an index number?
Is device for comparing the value of a variable in one period or location with a base observation
What cause inflation?
Demand pull inflation and cost push inflation
What is demand pull inflation?
A rise is AD is excess of AS, which is more significant when experience rise in AD at time of full employment
What is cost push inflation?
A rise in the cost of production cause price to rise on the supply side of the economy
What causes deflation?
Caused by a lack of AD, so lower output and possibly the deflationary spiral
What are the consequences of inflation?
> fall in the value of money+ reduction in purchasing power
fall in the real rate of interest and return of savings and investment
uncertainty- invest, consume or save
loss of international competitiveness of exports
fiscal drag-tax bracket are not adjusted
cost of necessities increased
What are the consequences of deflation?
> deflationary spiral
reduce consumer and business confidence
reduce effectiveness of government policies
change in people’s expectations and behaviour
increase burden of debt
What is the deflationary spiral?
Delaying purchasing as know price is going to fall further
What is a benefit of deflation?
Results in a greater factor of production, increase competitiveness, improve current account and increase output and decrease unemployment
