Causes and costs of inflation
- 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
- By boosting aggregate demand, with Aggregate supply not changing
- 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
- Shift left in aggregate supply
- demand-pull
- 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
- results in lower output
- makes it difficult for firms to supply goods
- this disrupts spending
- Because prices will be higher in the future
- inflation is unpredictable
- 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
- this makes exports less competitive and imports more competitive
- if the value of the pound does not change on foreign desks
- Inflation may rise more quicker in the Uk than other countries
- Inflation may have a balance of payments effect
- Redistributional costs
- Fixed incomes
- Prices rise but income doesn't
- real income reduced
- interest savings
- negative
- reduction in the real value
- negative
- Indirect taxes
- reduce Government revenue
- Fixed incomes
- Political costs
- rising prices are deeply unpopular
- result in a new government
- rising prices are deeply unpopular
- Shoe leather costs
- costs from shopping around looking for better prices
- reduces productivity
- hold less cash
- prefer interest bearing deposits
- costs from shopping around looking for better prices
- menu costs
- costs in replacing menus
- Untitled
- costs in replacing menus
- Growth and Unemployment
- Causes
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