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Flashcards in Inflation Deck (47):
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.

31

Why is deflation bad for the government?

If prices and incomes fall then so does tax revenue.

32

What effect do expectations in terms of inflation?

Last year's inflation can be a factor when people form their expectations of what lies ahead and whether to spend money on something or not.

33

What is deflation?

The general price level is falling consistently over quite a long period of time.

34

How does the vicious cycle of deflation happen?

People wait for prices to fall even further and get cheaper, businesses are forced to lower their prices therefore average wages begin to decline.

35

Why is deflation more difficult to control than inflation?

There is no limit to how far you can raise interest rates whereas with deflation, there is a limit to how far you can cut interest rates.

36

What causes the deflation spiral?

When credit is exhausted.

37

What leads to growing levels of debt?

When buyers go on strike, people try to pay off their debt however in real terms it grows because it becomes more difficult to pay off as when prices fall, so do incomes.

38

What leads to growing levels of debt?

When buyers go on strike, people try to pay off their debt however in real terms it grows because it becomes more difficult to pay off as when prices fall, so do incomes.

39

What is the best way to precent deflation and why?

Cut long terms interest rates as this encourages spending and pushes firms in the direction of looking elsewhere for a better return on their money rather than buying up government debt.

40

What is the result of businesses looking elsewhere for a better return on their money rather than buying up government debt?

They start investing in businesses that provide employment and goods and services which helps to pull an economy out of deflation or prevent them from experiencing deflation altogether.

41

What happens when central banks cut their interest rates to below 0%?

They pay investors to borrow money and people have to pay to save.

42

What is hyperinflation?

Very high levels of inflation - usually over 100% per year.

43

What causes hyperinflation?

Bad government policies.

44

What is the effect of hyperinflation?

People want to spend their money as soon as possible because it will lose its value.

45

Why do we not aim for zero inflation in terms of growth?

Growth would be much lower than it could be.

46

Why do we not aim for zero inflation in terms of debt?

It is easier to pay off debt when there is some inflation as wages increase but debt does not.

47

Why do we not aim for zero inflation in terms of deflation?

Too high a risk of falling into deflation - consumers may delay spending which would worsen the situation.