Inflation and hyperinflation

Question 1

what causes inflation? (specific)

Answer 1

• War in Ukraine causes scarcity in wheat output, so countries that rely on them for wheat will switch to the same place as other countries, increasing the demand so businesses raise prices.
• As fewer people buy oil/gas from Russia, countries buy from the same producer, increasing demand so they raise the price
• BREXIT causes higher taxes and paperwork in imports from the EU
• transport costs add to the cost of goods/services

Question 1

what is inflation?

Answer 1

the sustained rise in the price of goods/services, so the price of general goods increases over time.

Question 2

what does the Bank of England do to combat inflation and why?

Answer 2

raise interest rates so that borrowing is made more expensive. This means that those with mortgages and car loans will have less money to spend on other goods/services, reducing demand so prices decrease.

Question 3

what is the UK’s target of inflation and how successful have they been?

Answer 3

2%, not very successful due to fluctuations of high inflation and deflation

Question 4

why is inflation positive?

Answer 4

it means that consumers have more money to spend on goods/services, causing increased demand so businesses increase prices to increase profit.

Question 5

what is hyperinflation?

Answer 5

an extremely rapid increase in the price of goods/services, causing the economy to be destabilized

Question 6

what are some characteristics of hyperinflation?

Answer 6

• government endorses mass printing of money
• money as an asset becomes worthless
• huge impact on standards of living and economic well-being
• normally occurs in countries with a corrupt or unstable government/economy
• associated with the collapse in real output/supply

Question 7

what are inflation expectations?

Answer 7

what people and businesses expect to happen to the price of goods/services. when a rise is established, this is hard to bring back down.

Question 8

what is a wage-price spiral?

Answer 8

when people expect a rise in prices, this causes wage rise claims and rising costs
1. cost of living increases causing people to be worse off in real terms
2. this causes real incomes to fall
3. this causes workers to bid with collective bargaining power for increased wages
4. this increases labour costs and cost of production (if the labour costs rise more than productivity)
5. as a result, businesses raise costs to protect profit
6. consumer price inflation rises again

Question 9

what happens to government revenue from indirect taxes during inflation?

Answer 9

revenue increases

Question 10

what are some consequences of inflation?
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Answer 10

1. decreased value of currency
2. consumers have to pay more for the same good
3. decrease in consumer confidence and purchasing power
4. decrease in business confidence causing uncertainty in future plans and long-term investments
5. decreased consumption and demand decreasing profits
6. raised interest rates make borrowing more expensive and investments more risky, causing a decrease in consumption of other goods, but benefits savers
7. increased personal debt
8. exports less competitive
9. decreased disposable income reduces quality of life, increasing inequality
10. fixed incomes suffer and resort to short-term loans to fund spending
11. decreased real incomes

Question 11

why are relative inflation rates important?

Answer 11

1. impacts competitiveness with international trade
2. could show an imbalance of trade (imports don’t equal exports)
3. in extreme cases capital flight and debt crises occur

Question 12

what is the capital flight?

Answer 12

when investors move their money out of the country and into another country that has a more stable currency

Question 13

why does capital flight happen?

Answer 13

investors start to worry about the stability of the economy and the value of currency due to fear of inflation so want to protect their assets by selling them in the country and moving the proceeds abroad.

Question 14

what effect does inflation have on yields on government bonds?

Answer 14

it causes them to raise interest rates to persuade investors to lend money causing taxes to increase

Question 15

what are yields on government bonds?

Answer 15

the interest rate the government offers to investors when they issue bonds

Question 16

why would investors want a higher yield on government bonds?

Answer 16

they want enough interest to combat the effects of inflation (decreasing the value of their investment)

Question 17

effects of high inflation on the government:

Answer 17

• put pressure to increase state welfare benefits to reduce poverty
• decreased tax revenue
• growth in real GDP falls
• increases the price of government borrowing due to increased market interest rates
• decreased global competitiveness threatens jobs, decreases exports and GDP

Question 18

who are the winners of inflation?

Answer 18

1. workers with bargaining power like trade unionists who can bid for improved wages
2. debtors: they owe less in a sense if nominal interest rates don’t rise as quickly as the inflation rate, becoming negative
3. producers gain increased profit if the cost of goods increases faster than the cost of production

Question 19

who are the losers of inflation?

Answer 19

1. retired people on real fixed incomes
2. lenders if real interest rates become negative
3. savers if the returns from their deposits become negative
4. workers on low incomes without bargaining power

Question 20

when is the wage-price spiral more likely?

Answer 20

when the increase in the cost of living causes people’s expectations of inflation to rise. Expectations of the future can drive behaviour today, so the Central Bank is concerned with keeping expectations under control to help meet their inflation target.

Question 21

what are the general causes of inflation?

Answer 21

1. demand-pull
2. cost-push
3. rise in standardised prices
4. increase in money supply

Question 22

what are some factors that increase inflationary pressures?

Answer 22

1. rise in property prices (increased consumer wealth causing a demand-pull inflation risk as people can spend more)
2. increasing world oil prices (increases costs for businesses which causes cost-push inflation as they raise prices to protect profit)
3. decreased exchange rate ( (increases export and import prices leading to a cost-push and demand-pull - from scarcity- inflation risk
4. increased expansion of money and credit from banks (increased consumer spending funded by loans which causes demand-pull inflation risk)

Question 23

what are the 5 supply-side policies to help control inflation?

Answer 23

1. invetsment in human capital to increase labour productivity and reduce labour costs
2. investment in infrastructure to reduce long-term costs for businesses
3. expansion of the worker-visa programme to increase skilled workers in the UK from the EU and beyond
4. investment in tax allowances to drive investment in renewable energy and gas storage to lower energy bills
5. policies to encourage house-building to address the chronic shortage and rent inflation (caused by raised interest rates)

Question 24

what kind of policy is increasing interest rates?

Answer 24

monetary policy
- leads to a decrease in the risk of demand-pull inflation by decreasing purchasing power and consumer confidence
- may slow growth as it decreases demand
- may strengthen exchange rates, decreasing the price of imports

Question 25

what kind of policy is increasing direct tax?

Answer 25

deflationary fiscal policy
- leads to a decrease in demand-pull inflation as it reduces the purchasing power and consumer confidence of more people than those affected by increased interest rates (only those with mortgages)