4.8 Inflation and Deflation

What is inflation?

A persistent rise in the general price of goods and services over a period of time usually measured yearly.

What is deflation?

Deflation is when the price of goods and services drop, which increases consumers purchasing power because now they have more money to spend than before.

What is hyperinflation?

When prices for a good or service increase rapidly

What is disinflation?

When the inflation rate decreases but is still positive.

How is inflation measured?

Its measured using consumer price index.

What is consumer price index (CPI)?

Tracks how the price of a typical basket of items changes over time.

What are the causes of inflation

demand pull and cost push

What is demand pull inflation?

Occurs when aggregate demand is growing at an unsustainable rate, leading to increased pressure on scarce resources.

What can lead to DP inflation

Depreciation of the exchange rate, lower taxes, higher government spending, fall in interest rates, and fast growth in other countries.

What can a fall in interest rate lead to in DP

This could lead to higher demand for loans or in leading to house price inflation.

What can fast growth in other countries lead to in DP?

This might provide a boost to exports overseas. Higher exports lead to higher AD.

What can a depreciation lead to in DP?

raises import prices and lowers export prices, leading consumers to spend more on domestic goods, which can cause demand-pull inflation.

What can lower taxes lead to in DP.

If direct taxes are reduced, consumers have more money to spend on things leading demand to increase.

What can higher government spending lead to in DP.

Higher government spending and borrowing creates extra demand.

What is cost push inflation?

When firms respond to higher production costs by increasing prices to protect their profit margain.

What are the 5 reasons cost may rise?

Components cost, increased labour cost, higher indirect taxes, low exchange rate, and monopoly employers

What are the effects of inflation?

Falling real incomes, menu and shoe leather costs, reduce the competitiveness of exports, create uncertainty for businesses, borrowers profit and lenders lose, and low-income families struggle most.