Inflation concepts

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What is inflation?
a sustained increase in the general price level over a period of time.
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What is deflation?
a sustained decrease in the general price level over a period of time.
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what is disinflation?
Decrease in the rate of inflation, ie. price level increases but at a decreasing rate.
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what is the general price level?
A general price rise occurs when the average level of prices increase, for example, the CPI rises from 1000 to 1035, the average level of prices has risen by 3.50%.
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what is an individual price rise?
A rise in price of a particular good or service or in several markets rather than an increase of prices in the entire economy.
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How individual price rise can affect the general price level?
Some goods such as petrol are a component of all goods costs of production, if they increase then the cost of production for all goods increases so firms increase their prices to maintain their profit margins, therefore this results in a carry on eff
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what is the quantity theory of money
asserts that if the money supply increases, then inflation will increase assuming that V and Q are unchanged (constant)
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Limitations of the quantity theory of money
The equation assumes that V and Q are unchanged but this can change, eg. if V and Q change then increase in M may cause an increase in Q while P remains unchanged, so increased in M do not necessarily lead to increases in P.
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Crude theory
assumed V and Q are constant but evidence shows this is not the cases. When prices rise rapidly people will be reluctant to hold money because it is losing purchasing power so they will exchange it for goods and services as quickly as possible.
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Sophisticated quantity theory
cknowledges that velocity is a variable but is relatively predictable so that is the Central bank can predict velocity it should be able to influence nominal Gross Domestic Product by controlling the money supply.
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Other cards in this set

Card 2

Front

What is deflation?

Back

a sustained decrease in the general price level over a period of time.

Card 3

Front

what is disinflation?

Card 4

Front

what is the general price level?

Card 5

Front

what is an individual price rise?