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Inflation…read more

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What is inflation?
Sustained increase in the general price level
It measures the annual rate of change in the general price
level of the economy
The office of national statistics (ONS) take a basket of
goods and measure whether this basket of goods has
gone up or down in price in the previous year. This basket
of goods is known as a weighted basket of goods. Items
you buy on a daily such as bread will be higher than things
such as TV, since the frequency is higher.
Consumer price index (CPI) ­ This is the official
government measure. A lot of people are argue that this
isn't as accurate as the RPI.
Retail price index (RPI) ­ RPI includes house prices
and mortgage repayments whereas the CPI doesn't.…read more

Slide 3

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Types of inflation and causes
Hyperinflation ­ High inflation
Deflation ­ A fall in the general price level
Demand pull inflation
Occurs when demand rises too quickly (demand >
supply). There is more demand, and businesses can'
t keep up so there is less supply
Often occurs during and following the periods of
extremely excessive growth
Cost push inflation
This occurs when AS falls relatively to AD. The cost
of production has risen and businesses cannot
make as much so price starts to rise
Both revolve around scarcity.…read more

Slide 4

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The consequences of inflation: Fall
in the value of money
There are a number of effects that may
arise as a result of inflation
The one certain consequence is a fall in
the value of money. With the price level
rising, each pound coin and other unit of
the country's money will buy less. The
purchasing power of money falls…read more

Slide 5

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Menu costs
This gets it name from how restaurants
are constantly changing their menus
during high times of inflation. But it now
has a wider meaning. It is applied to the
need for firms in general to alter their
prices in, for instance, catalogues,
newspaper advertisements and
websites. This may involve a lot of time
being taken up, and could increase
labour costs.…read more

Slide 6

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Shoeleather costs
This relates to the costs involved in
reducing holdings of cash and money in
current accounts and seeking the highest
rate of interest.
These are costs in terms of the extra
time and effort involved in reducing
money holdings…read more

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