Inflation + Price Stability Flashcards
(18 cards)
What is inflation?
a sustained increase in the general price level
What happens due to inflation?
a fall in the value of money
a rise in the cost of living
What does does price stability mean?
slow rate of inflation
What is the inflation target?
2%
What is deflation?
when prices fall
How is inflation measured?
the consumer price index
What are the steps to the consumer price index?
the householder expenditure survey measures what people spend their money on buy putting goods/services in a metaphorical basket and giving them a weight the basket of goods is updates to take into account a change of expenditure
What are 5 costs of inflation?
cost of reducing inflation
menu costs
income redistribution
international competitiveness
confusion and uncertainty of consumers
What are menu costs?
the cost of changing price lists
What is meant by the cost of reducing inflation?
to reduce inflation interest rates need to rise however this leads to lower economic growth and higher unemployment
What is meant by income distribution being a cost of inflation?
people like pensioners who rely on savings wee the value of their money fall
What are the two causes of inflation?
a rise in demand
a rise in costs of production
when is demand pull inflation?
when demand increases faster than supply capacity firms respond to excess demand by pushing up prices
What is cost push inflation?
this is caused by an increase in price of production which causes firms to increase prices
What are 4 reasons for cost push inflation?
higher wages
increase in the price of imports
increase in the price of raw materials
decline in productivity
What does the monetary policy do?
it increases interest rates to raise the cost of borrowing to decrease demand and lower economic growth
What does the fiscal policy do?
increases taxes and government spending to decrease demand and economic growth
What do the supply side policies do?
increase productivity
