Causes and costs of inflation

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  • Created by: jacksie
  • Created on: 20-05-21 15:04
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  • Causes and costs of Inflation
    • Causes
      • demand-pull
        • By boosting aggregate demand, with Aggregate supply not changing
          • Result in the price level rising
        • excessive consumption
          • very low interest rates
          • easy credit
        • Increase in Investment
          • Low interest rates
          • animal spirits are high
          • responding to rise in demand
          • need extra capacity
        • Government may cut taxes, or increase spending
        • global boom
          • high demand for UK exports
        • increase in the money supply
          • quantitative easing
          • increase lending
          • fractional reserve banking
      • Cost-push
        • Shift left in aggregate supply
          • with no rise in demand
        • Rise in wage rates
          • costs of production
        • rise in the price of raw materials
        • imports more expensive
        • government increase indirect taxes
          • cut subsidies
        • rise prices to increase profit margins
    • costs
      • Growth and Unemployment
        • inflation is unpredictable
          • Suppliers may want to reduce investment in a struggling macroeconomic climate
          • Consumers may want to bring forward consumption
            • Because prices will be higher in the future
              • this disrupts spending
                • makes it difficult for firms to supply goods
                  • results in lower output
                    • sluggish growth and higher unemployment
      • Competitiveness
        • Inflation may have a balance of payments effect
          • Inflation may rise more quicker in the Uk than other countries
            • if the value of the pound does not change on foreign desks
              • this makes exports less competitive and imports more competitive
                • slows growth
      • Redistributional costs
        • Fixed incomes
          • Prices rise but income doesn't
          • real income reduced
        • interest savings
          • negative
            • reduction in the real value
        • Indirect taxes
          • reduce Government revenue
      • Political costs
        • rising prices are deeply unpopular
          • result in a new government
      • Shoe leather costs
        • costs from shopping around looking for better prices
          • reduces productivity
        • hold less cash
          • prefer interest bearing deposits
      • menu costs
        • costs in replacing menus
          • Untitled

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