Inflation
- Created by: James Baxter
- Created on: 11-04-14 16:15
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- Inflation
- Sustained rise in the general level of price
- Measurements
- Consumer price index
- Geometric mean
- Weighted price index - changes in weights reflect shifts in spending patterns
- 1:Expenditure and food survey
- Info from 7,000 households
- Proportion of income spent on each item used to ascertain weighting
- 2: Price Survey
- 650 Goods and Services
- Prices gathered for each item
- Change x weight gives price index
- Limitations of CPI
- Only represents 'average' household and excludes top and bottom 4% income brackets and pensioners
- Doesn't include housing costs
- Changing quality of goods and services
- 650 items only changed per year - tastes change faster than this
- Retail Price index
- Costs of housing included
- Arithmetic mean value
- More inclusive than the CPI
- Consumer price index
- Deflation
- Rate of inflation becomes negative
- Hyperinflation
- Money has no worth
- Causes
- Rise in VAT
- External sources
- Types
- Demand Pull inflation
- AD growing at unsustainable rate
- More pressure on scarce resources - positive output gap
- Likely when there is full employment of resources
- Causes
- 3. Depreciation of the exchange rate
- 2. Higher demand from fiscal stimulus
- 1. Monetary stimulus to the economy
- Fall in IR may stimulate too much demand
- 4. Fast Growth in other countries
- AD growing at unsustainable rate
- Cost Push inflation
- Occurs when firms respond to rising costs
- Causes
- Component costs
- Rising labour costs
- Expectations of inflation
- Higher indirect taxes
- Fall in exchange rate
- imports = more expensive
- Monopoly - market power being used
- Demand Pull inflation
- Consequences of inflation
- Income redistribution
- Regressive effect on Low income families
- Falling real incomes
- Negative real interest rates
- Cost of borrowing
- May lead to higher interest rates
- Risks of wage inflation
- Business competative
- Income redistribution
- Controlling Inflation
- Fiscal Policy
- AD too high - Tighten - reduce spending on public and merit goods
- Changes in taxation and government spending
- Monetary Policy
- Changes in monetary variables such as Interest Rate or quantitive easing
- Tightening= central bank introducing higher interest rates to reduce consumer and investment spending.
- Fiscal Policy
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