econ unit 4

How is consumer price inflation measured?

By the % increase in the cost of a representative basket of household goods and services (CPI).

What is the main difference between the CPI and the GDP deflator?

CPI: Measures a fixed basket of goods/services bought by consumers (includes imports, excludes exports). GDP deflator: Measures prices of all domestically produced final goods/services (includes exports, excludes imports).

Distinguish between inflation, deflation, and disinflation.

-Inflation: General rise in prices (CPI ↑). Deflation: General fall in prices (CPI ↓). Disinflation: Inflation rate is positive but falling.

Who are the winners and losers from inflation?

Winners: Borrowers, flexible income earners. Losers: Savers, fixed income earners, pensioners. Inflation erodes purchasing power.

Why is deflation considered harmful?

It causes households to delay consumption, worsening recessions by lowering demand.

What does the intersection of the WS and PS curves represent?

The economy’s structural (equilibrium) unemployment rate where wage-setting equals price-setting.

What does the Phillips curve show?

An inverse relationship between unemployment and inflation: Low unemployment → higher wages → higher inflation. High unemployment → lower wage pressure → lower inflation

What happens when expected inflation increases?

The Phillips curve shifts upward, leading to higher inflation at any given unemployment rate

Differentiate demand-pull from cost-push inflation.

Demand-pull: Caused by ↑ aggregate demand, movement along Phillips curve. Cost-push: Caused by supply shocks (e.g., oil price ↑, union power ↑), shifting WS/PS

List and briefly explain the 4 main causes of inflation.

1. Demand-pull (↑ AD). 2. Cost-push (supply shocks). 3. Expectations-driven (higher expected inflation shifts Phillips curve). 4. Profit-push (sellers’ inflation: firms raise markups due to less competition or capacity constraints)

How does a global oil price increase affect the WS–PS model and inflation?

Shifts PS curve downward → higher structural unemployment. Creates a bargaining gap → rising inflation. Phillips curve shifts upward as expectations adjust.