Inflation

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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
    • 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
      • 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
    • 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
    • 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.

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