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A general sustained rise in the price
level of an economy…read more

Slide 2

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Inflation terminology
· Deflation Negative rate of inflation
· Hyperinflation occurs where the rate of
inflation reaches a very high level. A precise
definition does not exist and an inflation rate
of 100%-200% would be deemed as
· The rate of inflation is the % change in the
price index from one year to another. So if in
one year the price index is 104.1 and a year
later the price index has risen to 112.5, then
the annual rate of inflation = (112.5 ­ 104.1)
divided by 104.1 x 100. Thus the rate of
inflation = 8.07%.…read more

Slide 3

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History of inflation
· of inflation
· Brazil 1990 ­ inflation rate of 30,377%
(government funded expenditure by printing
money rather than tax revenues)
· UK 1975 ­ inflation rate of 24.2% (due to the oil
price shock in 1973)
· Zimbabwe 2009 ­inflation rate of 231 million %…read more

Slide 4

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Causes of inflation
· Inflation can come from both the demand and the supply-side and
also from internal and external economic events.
· Some inflationary pressures direct from the domestic economy, for
example the decisions of the utility businesses providing electricity
or gas or water on their tariffs for the year ahead, or the pricing
strategies of the food retailers based on the strength of demand and
competitive pressure in their markets. A rise in the rate of VAT
would also be a cause of increased inflation in the short term
because it increases a firm's production costs.
· Inflation can also come from external sources, for example a
sustained rise in the price of crude oil or other imported
commodities, foodstuffs and beverages.
· Fluctuations in the exchange rate can also affect inflation ­ for
example a fall in the value of the pound against other currencies
might cause higher import prices for items such as foodstuffs from
Western Europe or technology supplies from the United States ­
which feeds through directly or indirectly into the consumer price
index.…read more

Slide 5

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Demand Pull Inflation
· Demand pull inflation is caused by the
changes to the components of aggregate
demand AD=C+I+G+(X-M).
· Exchange rate movement
· Fiscal stimulus
· Monetary stimulus…read more

Slide 6

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Cost Push Inflation
· Caused by rising costs throughout the
economy, shifting SRAS to the left.
· Input resources
· Rising wages
· Increased indirect taxes…read more

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