inflation
- Created by: fatimahkhan
- Created on: 01-06-21 15:39
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- inflation
- main
- inflation target: 2%
- inflation below target is as bad as above target
- effects
- consumers / workers
- erodes real wages so reduced C
- labour is a derived demand, so unemployment may also fall
- erodes the value of real savings so cons conf and C lowers
- labour is a derived demand, so unemployment may also fall
- evaluations
- the value of debt is eroded so it is easier to pay back debts
- erodes real wages so reduced C
- firms
- business conf lowers and investment lowers which could have long term effect
- evaluation: depends on the extremity of inflation
- consumers / workers
- causes
- cost push
- an increase in costs faced by firms: rises in COP, bad harvests, rise in wages, fall in exchange rates
- evaluation: sometimes higher costs do not mean higher prices. firms can squeeze profit margins
- e: relationship between price and oil has weakened as substitutes have been introduced
- e: depends on the state sector
- context: price of oil quadrupling after oct 1973 arab-israeli war. uk rate reaching 25%
- demand-pull
- increase in price level bc of a shift out in AD
- evaluation: when there is a lot of spare capacity, no price increase. e.g: brexit uncertainty
- context: the barber boom in 1970s. loose fiscal / monetary policy so increased demand
- money supply
- cost push
- deflation
- deferred spending
- deflationary spiral: falling prices lead to lower consumption which leads to lower prices which leads to deferred spending
- context: uk 2015 after sharp drop in oil prices (uae over supply)
- negative wealth effect
- cpi measurement
- evaluations: substitution bias / inflation is overstated bc consumers are constantly substituting / changes are not made often enough
- main
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