Ncea Level 2 Inflation

Inflation

The rate at which the general level of prices for goods and services increases, leading to a decrease in the purchasing power of money.

Disinflation

The reduction in the rate of inflation, meaning prices are still rising but at a slower rate.

Deflation

The decrease in the general level of prices for goods and services, resulting in an increase in the purchasing power of money.

Nominal Indicators

Economic measures that are not adjusted for inflation, such as nominal wage and nominal GDP.

Real Indicators

Economic measures that are adjusted for inflation, such as real wage and real GDP.

Quantity Theory of Money (QTOM)

A theory stating that the general price level of goods and services is directly proportional to the amount of money in circulation.

Aggregate Demand (AD)

The total demand for all goods and services in an economy at a given overall price level.

Aggregate Supply (AS)

The total supply of all goods and services that firms in an economy plan to sell at a given overall price level.

Cost-Push Inflation

Inflation that occurs when rising production costs compel producers to increase prices.

Demand-Pull Inflation

Inflation that arises when the overall demand for goods and services exceeds their supply.

GDP Formula

GDP = C + I + G + (X − M), where C is Consumption, I is Investment, G is Government Spending, X is Exports, and M is Imports.

Factors Increasing Consumption (C)

Consumer confidence and lower interest rates are two factors that can lead to an increase in consumption, contributing to demand-pull inflation.

Factors Increasing Investment (I)

Decreased official cash rates and increased business confidence can lead to higher levels of investment, driving demand-pull inflation.

Effects of Inflation on Households

Inflation can erode the purchasing power of fixed incomes, discourage saving, encourage borrowing, and create fiscal drag.

Effects of Inflation on Government Operating Balance

Inflation can lead to increased government spending and fluctuating income from GST and income tax, impacting the overall operating balance.