Inflation
- Created by: studybee
- Created on: 02-02-14 16:18
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- Inflation
- Measurement
- CPI
- A weighted index showing changes in the average cost of buying a basket of goods and services for a typical household
- The CPI excludes payments on mortgage interest and is therefore usually lower than the RPI
- A weighted index showing changes in the average cost of buying a basket of goods and services for a typical household
- RPI
- CPI
- Government Policy Responses
- Fiscal
- Controlling AD can reduce inflation when necessary
- Reduce government expenditure
- Raise direct taxes, reducing real disposable income so that consumption falls
- Controlling AD can reduce inflation when necessary
- Monetary
- Introduction of a period of high interest to reduce consumer and investment spending
- Higher value exchange rate causing imports to rise (M+) and exports to fall (X-)
- Supply-Side
- Increase productivity, competitiveness and innovation in order to maintain lower prices
- Increase productivity to cause AS to shift outward, causing prices to fall
- Fiscal
- Causes
- Demand-Pull
- Occurs when AD is growing at an unsustainable rate leading to increased pressure on scarce resources. Firms are able to pull up prices and achieve bigger profit margins
- Depreciation of exchange rate
- Higher demand from fiscal stimulus
- Fall in interest rates
- Growth in Housing market
- Occurs when AD is growing at an unsustainable rate leading to increased pressure on scarce resources. Firms are able to pull up prices and achieve bigger profit margins
- Cost-Push
- Occurs when firm's cost of production rise. Firms then have to increase prices in order to stay in business
- Rising labour costs
- Higher indirect taxes
- Monopoly employers
- Occurs when firm's cost of production rise. Firms then have to increase prices in order to stay in business
- Internal
- Decisions of utility or food companies to change prices can have a massive effect on inflation as these are necessities
- Changes in VAT affect firms's costs, thus rising prices for goods and services
- External
- Fluctuations in the exchange rate can lead to higher import prices on goods such as foodstuffs from Western Europe or technology suppliers from the United States
- Demand-Pull
- UK Inflation
- Inflation Target
- Monetary Policy Committee's target of 2% per year using the CPI
- Recent Trends
- Steep rises in imported inflation caused by falling exchange rate and higher world prices
- Inflation Target
- Consequences
- Cost of Borrowing
- High inflation may lead to high interest rates for businesses and people needing loans and mortgages as financial markets protect themselves against rising prices
- Negative Real Interest Rates
- Savers experience the real value of their savings to fall if inflation is higher than interest rates
- Income Redistribution
- There is a regressive effect on lower income families
- Falling real incomes
- Pay freezes coupled with inflation reduce the real value of income
- Cost of Borrowing
- Key Concepts
- Inflation
- A sustained increase in the general price level over a period of time
- Purchasing Power
- The ability to purchase goods and services. Purchasing power will fall as a result of inflation
- Deflation
- A decrease in prices or the cost of living over a period of time
- Creeping Inflation
- When inflation increases gradually over time
- Hyperinflation
- Inflation that occurs at an excessively high rate, usually over 100%
- Rate of inflation
- The annual percentage change in consumer prices
- Inflation
- Hyperinflaton
- Hyperinflation occurs when the value of money becomes worthless an people lose confidence
- Zimbabwe, Brazil, Turkey, Weimar Germany
- Hyperinflation occurs when the value of money becomes worthless an people lose confidence
- Measurement
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