W2 - Inflation Flashcards
(25 cards)
What is inflation and how to control it?
Shows how fast prices are changing
- Must control moeny supply growth
What is consumer price inflation?
Trends of inflation (consumer patterns excluding price set by gov)
What is inflation inertia?
A tendency for inflation to remain stable over time, even when banks try to change it
How to work out inflation rate
(P - Ppast)/Ppast x100
How to work out inflation
% Change in money supply growth - % change in real GDP growth (production)
What inflation should be aimed for
Low and stable
- easier to capture price adjustments contracts and interest rates
Why is slow and steady inflation desirable?
- Inflation tax
- Redistribution of wealth
- The danger of deflation
Inflation tax
Inflation erodes purchasing power
- matters when you spend = real value
Redistribution of wealth
Savers loose from inflation but owing money your are better off
The danger of deflation
If price is falling, consumption and investment is postponed
- Economic stagflation
What is economic stagflation?
Period of slow/ no economic growth accompanied by high unemployment
2 main types of measure of UK household inflation
- Retail price index - 1948 (living standards of groups)
- Consumer price index - 1987 (more modern, includes rent and money for financial services)
How to construct a price index
- FInd out cost of basket at base period price
2.. Find out cost of basket at current period price - Use 100 x Cost of basket at current/ cost of basket at base
What is GDP deflator?
Index of the price of all the items in GDP (only g/s produced domestically enter)
Formula for GDP deflator
100 x Nominal GDP/ Real GDP
Negatives of GDP deflator
Includes nonconsumer items (military spending) so not a good measure of the cost of living - ethical issues
What is hyperinflation?
A situation where inflation is 50% or higher per month
Money loses value rapidly and the economy grinds to a halt
What are the types of inflation
- Demand - Pull
- Cost - Push
- Built in (wage - price spiral)
What is Demand - pull?
- Too much money chasing too few goods
- Caused = higher aggregate demand
- Happens = Economy is near capacity
- AD shifters = Higher consumption, investment, gov spending, exports
What is Cost - push?
Caused by rising costs of production, firms increase their price to maintain profit margins
- e.g increase wages, raw materials
What is Built in (Wage - price spiral)
Workers demand higher wages to keep up with prices, firms increase prices to cov er wage costs - SPRIAL
Consequences of high inflation
- Loss of purchasing power
- Uncertaintly of investments
- Wage - price sprial
- Menu + shoe leather costs
Consequences of low inflation
- Delayed consumption
- Real debt burden
- Reduce revenue
- High unemployment
What is menu costs
Expenses business face when changing prices
- e.g reprint menu, update digital site
