Economics 17
- Created by: Gabrielle
- Created on: 30-12-13 14:04
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- Inflation & Price Stability
- Classic Theory
- When the price level rises, people have to pay more for the goods and services that they purchase
- A rise in the price level lowers the value of money because unit of currency buys a smaller quantity of goods and services
- Increased supply of money: supply to right, equilibrium falls, price rises
- Costs of Inflation
- Fall in Purchasin Power - as prices rise, so do incomes
- Shoeleather costs - Inflation erodes the value of money that you carry in your pocket
- Menu Costs - cost of changing prices
- Inflation distorts relative prices and with it consumer decisions
- Inflation discourages saving, so reducing funds for investment and future growth
- Value of money falls. Causing a confused valuation of goods
- In the short run there is a trade off between inflation and unemployment
- A supply shock is an event that directly affects firms’ costs of production
- To reduce inflation the central bank has to pursue contractionary monetary policy
- To reduce inflation the central bank has to pursue contractionary monetary policy
- A policy change that has the effect of reducing the natural rate of unemployment
- shifts the long-run Phillips curve to the left.
- Classic Theory
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