Inflation mindmap
- Created by: M131
- Created on: 01-04-16 17:12
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- Inflation
- Definition: A sustained rise in the general price level.
- Measured in CPI or Consumer Price Index.
- A consumption survey (always with 650 people) is conducted to see what people buy most, then a price survey is done to see how much these goods cost.
- It is an index, so on the first year (the base year), each good's price was given a value of 100
- Every time inflation is measured (quarterly), prices are compared to the base year using percentages.
- Eg: If prices in 2nd quarter of 2001 were 25% more than in the base year, CPI would be 125.
- Every time inflation is measured (quarterly), prices are compared to the base year using percentages.
- It is an index, so on the first year (the base year), each good's price was given a value of 100
- A consumption survey (always with 650 people) is conducted to see what people buy most, then a price survey is done to see how much these goods cost.
- What are the causes of inflation?
- Demand-pull inflation: Inflation caused by excess demand in the economy.
- Cost-push inflation: Inflation caused by a rise in costs in the economy.
- Why is inflation bad?
- Elderly are extremely vulnerable as they have fixed pensions and savings, so the value of their money decreases.
- Social/ political unrest: Riots
- People spend more money in panic because they want to buy as much before the price rises too high for them.
- This causes a spiralling effect and raises inflation which can cause hyperinflation.
- Hyperinflation is a rate of inflation
- This causes a spiralling effect and raises inflation which can cause hyperinflation.
- Terms:
- Shoe leather costs: If prices are unstable, firms and consumers spend more time looking to find a reasonable price. This extra time and effort spent is known as SHOE LEATHER COSTS.
- Menu costs: Firms have to adjust their price lists more often when there is inflation. There are extra costs when items of capital equipment such as vending machines have to be changed.
- Income-redistribution problems: Savers and creditors lose out because of this. Savers lose the value of their money because prices have increased and creditors lose money because when the debtor repays loans, the real value repaid is lower than when the loan was taken out.
- Boom and bust cycle: the economy is doing well then people spend, companies invest, prices go up so the central bank wants to cool down the economy by raising interest rates which means that consumption and investment
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