inflation Flashcards
(13 cards)
define inflation
a persistent and appreciable rise in the general level of prices across the economy.
in other words price increases across time and across a range of goods
what are the 3 Econ objectives
- Sustainable Econ growth
- full employment
- Price Stability (low, stable rates of inflation)
how is inflation measured
by calculating the consumer price index (CPI)
what does CPI measure
The CPI measures the average change in price of a sample of goods and services that represent a high proportion of household expenditure
what is the target rate of inflation
2-3%
What are the 2 types of inflation
Demand - Pull inflation
Cost - Push inflation
what is demand - pull inflation.
when an increase in demand exceeds the current level of goods and services and price increases
what is cost - push inflation
when an increase in the cost of producing goods and services is passed on to consumers through higher prices
demand pull - how it can occur
- increase in consumer expectations for the future
- increase in business confidence
- increase in income
- lower interest rates
- increase in exports
cost push - how it can occur
- increase in wages paid to employees
- increases in interest rates
- increase in government taxe rates
- increase in cost of raw materials (eg. natural disaster)
what are the consequences of inflation and what do they impact?
output effects - impacts on levels of output, income and employment
Redistribution effect - impacts on the wealth and income in the economy
what does output effect impact (1)
high inflation reduces purchasing power if income does not rise in line with price if prices rise rise faster than income, real income falls and households cannot afford the same volume of goods and services
what are the 2 inflation extremes
hyper inflation - rates of inflation above 30% per annum
deflation - a reduction in the general level of prices across the economy
