Economics

What are the 3 Causes of Inflation?

What are the 3 Causes of Inflation?

Demand-pull, inflation expectations, cost-push

Inflation Expectations

Rate at which average prices are anticipated to increase next year.

Demand-pull inflation

Inflation resulting from excess demand.

Cost-push inflation

Inflation that results from an unexpected rise in production costs.

What is the inflation formula?

Inflation = Expected inflation + Demand - pull inflation + cost - push inflation

If the president announces an unexpected tariff, what will happen?

Cost-push inflation will rise.

What do businesses consider when raising prices?

Current input costs and competitor prices

If people think inflation will get higher, what will happen to inflation?

Inflation will rise

What are the 3 methods for measuring inflation expectations?

Survey of consumers, surveys/forecasts of economists, financial markets

What are inflation expectations based on?

They can be: adaptive, anchored, sticky, or rational.

What is excess demand?

when quantity demanded at prevailing price exceeds the quantity supplied.

What does excess demand do for inflation?

Inflation will rise above inflation expectations.

What happens to inflation with insufficient demand?

Inflation will fall below expectations.

What is inflation equal when the economy is working at full capacity?

Inflation will equal inflation expectations.

What does the output gap measure?

Imbalance between output and productive capacity.

What is demand-pull inflation driven by?

The output gap

What is unexpected inflation?

The difference between inflation and inflation expectations.

What does the Philip’s Curve illustrate?

The link between output gap and unexpected inflation.

What happens when output gap is positive?

Inflation rises beyond inflation expectations.

What happens when output gap is negative?

Inflation falls below inflation expectations.

How do people assess the economy with the phillip’s curve?

They assess inflation expectations, and they forecast unexpected inflation

What does the labor market Philip’s Curve measure?

It links unexpected inflation to the employment rate.

What happens when unexpected boosts to production occurs?

Prices will raise, resulting in cost-push inflation

How do rising costs shift the Phillips Curve?

The curve will shift upwards.

What’s a supply shock?

Any change in production costs that leads suppliers to up the costs

What shifts the Philips Curve?

Input prices, productivity, exchange rates