64136
Inflation
- " sustained general increase in price"
- Measured:
- CPI- measure of the price level used EU as BofE as int
rates target. Lower than RPI.
- RPI- traditional method, excludes mortgages and
taxes
- Aim to achieve price
stability
- Creeping- general
steadily creep up few
% on avg each year.
- Prices of baskets of goods+services are
recorded each month items are weighted with
importance.
- CPI- measure of the price level used EU as BofE as int
rates target. Lower than RPI.
- How accurate are
indices used to
measure:
- Household spending patterns change
overtime
- Measures an avg rate for all households
BUT in reality each household has
different rates of inflation
- Goods may increase in price but
because of higher technical capacity
- Household spending patterns change
overtime
- Hyperinflation:
- Money becomes worthless
- Huge amounts of cash printed to meet
demand
- Effect is always collapse in business confidence, recession,
war and civil unrest
- In most cases a new
monetary system has to be
created. EXAMPLE: 1920s
Germany £20m
Deutschmark was worth a
match box. Russia prices
^ 36%of inflation.
- Money becomes worthless
- Why have we kept inflation under
control?
- Technology reduced costs of
production
- More global competition so firms keeps
prices low
- Steady wage rates
- Success of BofE in keeping AD under
control by controlling int rates
- 1990s-steady growth,
unemployment falling steadily,
cheap imports , no inflationary
pay claims
- Technology reduced costs of
production
- Cure:
- MONETARY- raise int rates
to deflate AD but then output
suffers
- FISCAL- tax^ to reduced demand
pull inflation
- Offer tax free loans to ^ money
supply to create jobs. E.g 20%
tax free on a new house
- MONETARY- raise int rates
to deflate AD but then output
suffers
- Consequences
- Money loses
value- confidence
and savings
eroded
- Cost push inflation
- Disrupts business
planning+ investment
( buy now or later )
- FAVOURS- borrowers as
inflation erodes value of existing
debt. AD^ so inflation.
- BAD-pensions and savings eroded.
- BAD-pensions and savings eroded.
- High prices so
not as
competitive=
unemployment ^
- High inflation so high interest
to decrease AD
- If inflation ^ in uk then the value of the
£ doesn't change on foreign markets so
exports less competitive
- People feel less "
well off" = bargain
hunting
- Opposite of wealth effect
- Shops must adjust prices
- Money loses
value- confidence
and savings
eroded
- Types and causes:
- Demand-pull
- WHAT-Excess demand in +ve output
gap. Businesses respond to high
demand by price ^ . Supply cannot
respond as quickly( in elastic SRAS)
- WHY- high levels of
spending( tax down so income
^). Fast growth of demnd for
credit +borrowing.fast growth
in countries buying our
exports.
- WHY- depreciation of UK £- price^
of imports and £dwn of exports
- WHY- depreciation of UK £- price^
of imports and £dwn of exports
- WHY- high levels of
spending( tax down so income
^). Fast growth of demnd for
credit +borrowing.fast growth
in countries buying our
exports.
- WHAT-Excess demand in +ve output
gap. Businesses respond to high
demand by price ^ . Supply cannot
respond as quickly( in elastic SRAS)
- MONETARIST
- MV=PT money supply x velocity of money= prices x
transactions (GDP)
- Money travelling at speed over time raises prices- at the point
when spending slows prices has gone up.
- ^ in money supply= fuel demand pull
inflation.
- MV=PT money supply x velocity of money= prices x
transactions (GDP)
- COST-PUSH
- WHAT- increase in cost of production wages/imports , inelastic price rises eg gas, ^ in tax = prices
^ and demand for higher wages so inflation
- WHY- cost of production^ due to commodity price^ (external shock). Depreciation of UK
£. ^ in wages.
- Firms raise prices to makre more profit margin as costs rise.
Therefore prices^. Rising cost for business= gas, water,
legislation,wages.
- INDEXATION- A way to anticipate inflation by raising
public sector pay rises in line with inflation. people
demanding the wages are causing the proble
- WHAT- increase in cost of production wages/imports , inelastic price rises eg gas, ^ in tax = prices
^ and demand for higher wages so inflation
- Demand-pull
Want to create your own Mind Maps for free with GoConqr? Learn more.