AS91222 Level 2 Economics: Inflation Vocabulary

Vocabulary practice flashcards covering definitions, formulas, graph axes, and components of inflation from NCEA Level 2 Economics.

Inflation

A sustained increase in the general price level.

General Price Level

The average price of goods and services in the economy.

Purchasing Power

How many goods and services a certain amount of money can buy.

Consumer Price Index (CPI)

A index measuring changes in the prices of a basket of goods and services bought by households.

Inflation Rate Formula

$$\text{Inflation rate} = \left(\frac{\text{New CPI} - \text{Old CPI}}{\text{Old CPI}}\right) \times 100$$

Aggregate Demand (AD)

Total spending on goods and services in the economy, defined as $AD = C + I + G + (X - M)$.

Aggregate Supply (AS)

The total quantity of goods and services businesses are willing and able to produce.

Demand-Pull Inflation

Inflation caused by an increase in Aggregate Demand ($AD$), leading to increased Price Level and increased Real GDP.

Cost-Push Inflation

Inflation caused by an increase in production costs and a decrease in Aggregate Supply ($AS$), leading to increased Price Level and decreased Real GDP.

Quantity Theory of Money

An economic theory represented by $MV = PY$, showing that an increase in the money supply ($M$) causes higher price levels ($P$) if production ($Y$) does not increase.

Velocity of Circulation (V)

The rate at which money circulates in the economy, as represented in the Quantity Theory of Money equation $MV = PY$.

Nominal Value

Value measured in dollars without accounting for inflation.

Real Value

Value measured after accounting for inflation.

Price Level (PL)

The variable measured on the vertical axis of the $AS/AD$ graph.

Real GDP / Real Output (Y)

The variable measured on the horizontal axis of the $AS/AD$ graph.

Consumption (C)

Consumer spending on goods and services, representing a component of Aggregate Demand.

Investment (I)

Spending by businesses on capital equipment and production goods, representing a component of Aggregate Demand.

Government Spending (G)

Total expenditure by government bodies on goods and services, representing a component of Aggregate Demand.

Net Exports (X - M)

The value of exports ($X$) minus imports ($M$), representing external balance in Aggregate Demand.