Econ1000 inflation unit 7

What is inflation?

Inflation is the rate at which the general level of prices for goods and services rises, leading to a fall in the purchasing power of a currency. It is typically expressed as an annual percentage. When inflation rises, each unit of currency buys fewer goods and services, making it a critical point for economic health and consumer purchasing power.

What causes inflation?

Inflation can be driven by various factors, including:

• Increased money supply: Central banks may inject more money into the economy, leading to greater demand for goods and services without a corresponding increase in supply.

• Demand-pull inflation: When demand for goods and services exceeds their supply, competition among buyers drives up prices.

• Cost-push inflation: Rising production costs, such as wages or raw material prices, force producers to increase prices to maintain profit margins.

• Imported inflation: Inflation can occur due to rising prices of imported goods and commodities, which may be influenced by exchange rate fluctuations.

• Expectations of future inflation can also contribute, as companies and consumers factor rising prices into their financial decisions, leading to preemptive price increases.

Why do inflation rates differ across countries?

Inflation rates can vary due to differences in monetary policy, economic conditions, and demand for money.

Why is inflation harmful?

Inflation can lead to resource misallocation, difficulty in comparing prices, and arbitrary redistributions of income.

What reflects persistent inflation in an economy?

A country’s long-run average rate of inflation is strongly influenced by the rate of money supply growth relative to the demand for money.

How does excessive money growth occur?

Excessive money growth can happen when money demand fluctuates and governments compel central banks to provide more money.

What are menu costs?

Menu costs refer to the expenses businesses incur when changing prices.

What is the relationship between money supply and inflation?

An increase in the money supply without a corresponding growth in the economy can lead to inflation.

What is meant by "inflation tax"?

Inflation tax refers to the reduction in purchasing power due to inflation, similar to a tax on money.

What is meant by resource misallocation?

A situation where inflation makes it difficult to compare prices accurately, leading to inefficient resource distribution.

What is demand-pull inflation?

Demand-pull inflation occurs when demand for goods and services exceeds their supply, leading to higher prices.

What is cost-push inflation?

Cost-push inflation happens when the costs of production rise, causing producers to increase prices.

What role does the central bank play in controlling inflation?

The central bank can influence inflation by adjusting interest rates and regulating the money supply.

How can inflation affect savings?

Inflation erodes purchasing power, diminishing the value of savings over time.

What is hyperinflation?

Hyperinflation is an extremely high and typically accelerating inflation rate, often exceeding 50% per month.

What indicator is commonly used to measure inflation?

The Consumer Price Index (CPI) is a commonly used measure of inflation.

How can inflation impact fixed income earners?

Inflation reduces the real value of fixed income, making it harder for earners to maintain their purchasing power.

What is stagflation?

Stagflation is an economic condition characterized by stagnant growth, high unemployment, and high inflation.

What measures can be taken to combat inflation?

To combat inflation, policymakers can raise interest rates, reduce government spending, or increase taxes.

What is the significance of inflation expectations?

Inflation expectations influence consumer behavior and wage negotiations, potentially leading to actual inflation.

What is inflation?

An increase in the overall level of prices in an economy.

What causes inflation?

Inflation is caused by an increase in the money supply, demand for goods, and production costs.

What is core inflation?

Core inflation excludes volatile items like food and energy to provide a clearer view of inflation trends.

What is the impact of inflation on purchasing power?

Inflation decreases purchasing power as money buys fewer goods and services.

What is deflation?

Deflation is a decrease in the overall level of prices in an economy.

What is the effect of inflation on interest rates?

Inflation typically leads to higher interest rates as lenders seek to maintain their purchasing power.

How is inflation measured?

Inflation is commonly measured using the Consumer Price Index (CPI) or the Producer Price Index (PPI).

What is a hyperinflation scenario?

Hyperinflation occurs when inflation rates exceed 50% per month.

What is moderate inflation?

Moderate inflation is a gradual increase in prices, typically within a range of 1-3% annually.

What is galloping inflation?

Galloping inflation refers to an inflation rate that is in the double or triple digits.

How does inflation affect fixed expenses?

Inflation can increase fixed expenses, diminishing the value of contracts or salaries that do not adjust.

What is the relationship between inflation and unemployment?

The Phillips Curve suggests an inverse relationship between inflation and unemployment in the short term.

What is a price index?

A price index measures the weighted average of prices of a basket of consumer goods and services.

What can cause cost-push inflation?

Cost-push inflation can result from increasing costs of production, such as wages and raw materials.

What is repressed inflation?

Repressed inflation occurs when prices are artificially kept low through government controls.

What is the Inflation Reduction Act?

It's U.S. legislation aimed at reducing inflation by lowering consumer costs and increasing energy efficiency.

What is the impact of inflation on investments?

Inflation can erode the real returns on investments and shift investor behavior toward assets that hedge against inflation.

What is wage-price spiral?

A wage-price spiral occurs when rising wages increase production costs, leading to higher prices.

How do central banks control inflation?

Central banks can control inflation by adjusting interest rates, influencing money supply, and using reserve requirements.

What is the consumer price index (CPI)?

The CPI measures the average change over time in the prices paid by consumers for goods and services.

What are the causes of demand-pull inflation?

Demand-pull inflation can arise from increased consumer spending, government spending, and investment.

What is inflationary gap?

An inflationary gap occurs when the actual output of an economy exceeds its potential output.

What is the Fisher Effect?

The Fisher Effect describes the relationship between nominal interest rates, real interest rates, and expected inflation.

What is purchasing power parity?

Purchasing power parity is an economic theory stating that in the long run, exchange rates should adjust to equalize currency purchasing power.

What impact can inflation have on Social Security payments?

Inflation can lead to cost-of-living adjustments in Social Security payments to maintain purchasing power.

What is the role of inflation targeting?

Inflation targeting is a monetary policy strategy aimed at maintaining a specified inflation rate.

What does it mean if inflation is volatile?

Volatile inflation refers to significant and unpredictable fluctuations in the inflation rate.

What is anticipated inflation?

Anticipated inflation is the expected rate of inflation that consumers and businesses factor into their economic decisions.

What is the substitution effect in terms of inflation?

The substitution effect refers to consumers changing their purchasing behavior in response to changing prices.

How does inflation affect international trade?

Inflation can affect a country's competitiveness in international markets by altering the value of its currency.

What is a deflationary spiral?

A deflationary spiral is a situation where decreasing prices lead to lower production, reduced wages, and further decreases in demand.

What are price controls?

Price controls are government-imposed limits on the prices charged for goods and services, often used to combat inflation.