inflation

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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
        • evaluations
          • the value of debt is eroded so it is easier to pay back debts
      • firms
        • business conf lowers and investment lowers which could have long term effect
        • evaluation: depends on the extremity of inflation
    • 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
    • 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

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