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Flashcards in Inflation Deck (47)
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1

What are the effects of inflation on a worker and why?

They may have to work overtime to compensate for the increase in the costs of production.

2

What is demand-pull inflation?

This is when producers increase their prices in order to choke off excessive demand. It will cause an increase in the AD components.

3

What is cost-push inflation?

This is caused by an increase in the costs of production and therefore shifts the AS curve upwards.

4

What is quantitative easing?

This is increasing the supply of money in an economy.

5

What is a consequence of inflation in terms of exports and imports?

Reduced exports due to higher domestic prices and the amount of imports increase as foreign goods are cheaper - this means the current account deficit worsens.

6

What is an evaluation point about the effect of inflation on exports and imports?

Need to consider the relative inflation as if inflation abroad is higher than domestically, the opposite effect is seen.

7

What is a consequence of inflation in terms of wages?

Workers demand higher wages.

8

What are menu costs?

These are the costs of changing labels, fixed capital, price lists and so on.

9

What effect does inflation have on savings?

It erodes the value of savings.

10

What effect does inflation have on those who have a fixed income?

They become poorer in real terms as their wages do not rise in line with inflation.

11

What effect does inflation have on those who have a fixed income?

They become poorer in real terms as their wages do not rise in line with inflation.

12

What effect does inflation have on business confidence?

There is increased business uncertainty as firms like low and stable inflation, this leads to a fall in investment.

13

What are shoe-leather costs?

The costs of shopping around for cheaper deals on supplies, transferring money between accounts and so on however this won't occur if there is low inflation.

14

What are the effects of inflation on redistribution issues?

Those unable to bargain over wages will be relatively worse off.

15

What are the psychological and political costs associated with inflation?

Price rises are unpopular - people may feel worse off even if their wages rise by the same amount.

16

What is the wage-price spiral?

This is when some initial inflation prompts workers and their trade unions to demand a pay rise, this increases the firms' costs of production and means they have to 'push' up their prices if they are to maintain their profit margin, the higher wages will enable workers to spend more money which increases consumption causing more inflation but as there is more inflation, workers and their trade unions demand higher wages and the whole cycle starts again.

17

How can the wage-price spiral be controlled?

Through the government bringing the trade union and their wage demands under control.

18

What does the Fisher equation of exchange state?

MV = PT.

19

What do the letters in the Fisher equation stand for?

M = amount of money in circulation, V = the velocity of the circulation of that money, P = the average price level and T = the number of transactions taking place.

20

What can the PT component of the Fisher equations also be seen as?

Aggregate demand.

21

What type of equation is the Fisher equation?

An identity therefore it will always be true

22

What is the Quantity Theory of money?

There is a direct and proportional link between the money supply and inflation.

23

What is the Quantity Theory of money?

There is a direct and proportional link between the money supply and inflation.

24

What is the benefit of a little inflation in terms of consumer spending?

It encourages consumers to buy sooner which boosts the economy.

25

What is an advantage of inflation in terms of dent?

It erodes debt as wages will rise in line with inflation whereas debt won't so in real terms, the value of debt has fallen.

26

What is an advantage of inflation in terms of wages?

Rising prices makes it easier for companies to put up wages, they also give employers the flexibility not to increase wages by as much as inflation but still offer their staff some sort of rise.

27

What is a disadvantage of zero inflation in terms of wages?

Some companies may be forced to cut wages which would not be good for morale, recruitment or productivity.

28

Why does the government love inflation?

The government has a huge debt so it would love to see that eroded which in turn would see its own income rise.

29

What does inflation do to the value of money and when is this not the case?

It reduces it unless interest rates are higher than inflation.

30

Why is deflation bad for the government?

If prices and incomes fall then so does tax revenue.