inflation --econs

inflation defintion

Sustained increase in the general price level or average price level of goods and services in a country over a period of time , usually a year (it lowers PP)

deflation definition

sustained decrease in the general price level or average price level of goods and services in a country over a period , usually a year (higher PP)

disinflation

decrease in the rate of inflation

change in rate of inflation differs from inflation because/rate of inflation definition

rate of inflation —> change in how fast the price level is rising

causes of inflation

1. demand pull inflation

2. cost-push inflation

demand pull inflation

• caused by increase in AD , in turn brought about by changes in any of the determinants of AD

• the increase in APL due to an increase in AD is called demand-pull inflation (the inflationary gap)

• when an economy Is already operating at full employment equilibrium level, any further increase in AD will only result in an increase in average price level and no increase in level of real GDP → because counteract with SRAS bringing it back to yf which only cause APL to increase

Cost-push inflation

• caused by an increase in costs of production (cause SRAS to fall) or supply side shocks

• represented by a decrease in SRAS, inflation + fall in real GDP + unemployment

• increase in APL due to fall in SRAS is known as cost-push inflation

• stagflation present — both inflation and unemployment present

• deflationary gap diagram

inflation due to excess monetary growth

• excessive increase in money supply by government cause inflation

• more money spent , increase C in AD , in the LR will have inflationary gap

real income

purchasing power, refers to what your money can buy, adjusted to inflation

• decreases as prices rise

• increases as prices fall

nominal income

does not consider inflation , the amount of money you receive in dollar term??

Purchasing power

how many goods and services your money can buy

(formula*)percentage change in real income =

%change in nominal income (not adjusted to inflation)- %change in price level

• this is rate of inflation

Costs of inflation

1. Loss of purchasing power

2. Effect on savings

3. Effect on interest rate

4. Effect on international competitiveness

5. uncertainty

6. labour unrest

Policies to solve inflation — demand pull

1. contractionary fiscal policy

2. monetary policy

Policies to solve inflation — cost push

1. demand side policies (may reduce APL but results in lower real national income + higher unemployment)

2. supply side policies