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Inflation and the Phillips Curve
UNIT 3…read more

Slide 2

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A brief history of inflation in the UK
· Acute problems with inflation ­ accelerating and very varied with a lack of price stability which was
the government's main objective
· Inflation became primary objective
· Monetary policy was very effective
· Inflation was for the most part on target (between 1-2%)
· From here till 2008 was the longest period of economic growth
· Sudden burst of cost-push inflation caused by increases in the oil/food (commodities) markets
(imported inflation)
· Recession created caused aconsumer confidence which was worsened knowledge of credit crunch
in USA
Present day
· Low inflation at around 0.3% caused by lower energy and fuel prices
Measuring inflation in the UK
· Currently the CPI (consumer price index) is used to measure inflation in the UK. This is the same
technique used in the eurozone
· pre-2003 the retail price index was used ­ which is still used today to set welfare benefit increases
and takes into account mortgage interest payments and council tax payments…read more

Slide 3

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Inflation, deflation and reflation
· A continuous and persistent rise in the price level and
fall in the value of money
· A continuous and persistent fall in the price level and
rise in the value of money
· Can be loosely applied to describe a reduction in
aggregate demand and levels of economic activity
· An increase in real output and employment following
an increase in aggregate demand…read more

Slide 4

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History of the believed causes of
inflation in the UK
· Old quantity theory of money is dominant
· Problem of inflation disappears. Keynes explains inflation in terms of deficient
aggregate demand
· Keynes theorised that in times of full employment excess demand can increase the
price level (demand-pull inflation)
1950s- 1960s
· Monetarist theory of inflation develops when Milton Friedman revives old quantity
theory of money
· Founding of the phillips curve
· Controversy between cost-push and demand-pull explanations of inflation due to
conflict between keynesian, monetarist and classicist views
· Problem of inflation disappears and is replaced by a fear of deflation/falling prices…read more

Slide 5

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Causes of inflation
Demand theories on the causes of inflation:
· The old quantity theory of money
· Keynesian demand-pull theory of inflation
· Keynesian cost-push theory of inflation
· Monetarist theories of inflation…read more

Slide 6

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The old quantity theory of money
· The theory that assumes inflation is caused by
a prior increase in the money supply
· The quantity theory of money is based on a
special case of demand-pull inflation where
rising prices are caused by excess demand
which is due to an excess supply of money ­
"too much money chasing too few goods"
· The theory has been developed by the "Fisher
equation of exchange" which is...
Money supply x velocity of circulation = price level x total transactions…read more

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