Inflation-MindMap

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  • Inflation
    • Causes
      • Demand-pull-Aggregate demand
        • Increase in AD
          • Excessive growth AD compared to supply allows sellers to raise profits
            • High consumer spending
              • High levels of confidence in consumers future employment prospects
              • Low interest rates means cheap borrowing and greater spending
            • High demand exports
              • Rapid economic growth in other countires
            • Money supply growing faster then output
              • Leads to rise in prices
            • Bottleneck shortages
              • Demand grows quickly, labour resources at max, increasing output leads to shortages
                • Causes prices to rise and firms'' cost to increase
          • Shifts sright
      • Cost-push-Aggregate supply
        • Increase in production costs, eg taxes, wages, raw materials
          • Producers pass high cost to consumers to make profit
            • Wages
              • If wages are above increase in productivity
                • Wages make up large % of firms' total costs leads to rise in prices
                  • Leads to further wage demands leads to price increases (Wage price spiral )
            • Taxes
              • Government raises indirect tax, increases costs and prices
              • Good=Elastic then increases cost of tax passed to consumer
            • Imported raw materials
              • World prices of inputs rise, producers pay higher cost and set higher prices
              • Currency decreases, producers pay more for same imports
          • SRAS shifts left
    • Costs
      • Standard of living on fixed/near fixed incomes fall
        • Biggest impact on low income/ welfare benefits
      • Competitiveness reduced as exports cost more and imports cheaper
        • Exports fall and imports rise creates deficit and unemployment increases
      • Discourages saving
        • Value of savings falls so more attractive to spend before prices rise further
          • Reluctance to save creates shortage funds for borrowing and investments
            • Creates uncertainty for firms- harming future growth
      • Shoe leather costs
        • More research needed to establish market prices as they are changing frequently
          • Firms will need to adjust prices more frequently
            • Transaction cost
      • Fiscal drag
        • When real incomes decline because tax deductions rise as thresholds aren't adjusted for infaltion
          • Money illusion: When rises in nominal wages lead individuals to believe they are better off when real wages have declined
    • Definition
      • Sustained rise in the average price of goods and services over a period of time
        • Modest, steady and consistent- Encourages consumption
      • Deflation: When the price level in an economy falls over time
        • Low and risk of deflation- Discourages consumption
          • Falling prices means you can save money by waiting for lower prices
      • Hyperinflation:  Large and rapid increases in price level which undermines value of money and discourages economic activity
        • Rising and volatile- Discourages consumption
          • Fall in value of money means a fixed amount of money buys less
    • Measures
      • RPI
        • Measures prices for 700 goods and services
          • Prices checked each month- 100,000 shop prices for 520 items
            • 80,000 prices for 190 items via web, email, phone
              • Index weighted based on how much we spend
        • Used for indexing welfare benefits, includes housing prices
      • CPI
        • Used for BoE inflation rate, doesn't include housing prices
    • Benefits
      • Encourages consumption
      • Incentives production: higher prices=more production in short term
      • Easier for firms to cut real wage costs
      • Reduces the debt burden
        • £120,000 mortgage over 25 years  2% inflation     120,000/1.02^25

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