LC Economics- Monetary Policy and price level

inflation

refers to an increase in the general level of prices

CPI

consumer price index measures the change in the average level of prices paid for consumer goods/services

uses of CPI

measures inflation and is an indicator of performance, policy makers use CPI when making decisions, international comparisons

limitations of CPI

based on average pattern of spending, doesn’t distinguish between rural and urban dwellers

harmonised index of consumer prices

used to compare EU countries

monetary union index of consumer prices (MUICP)

measures inflation within the eurozone00

economics effects of inflation

inflation reduces the purchasing power of money, people on fixed wages suffer a lower standard of living, reduces the purchasing power of savings 

nominal wage

the wage of a worker before its adjusted for inflation

real wage

the wage of a worker after its adjusted for inflation

% change in the real wage

% change in nominal wage- inflation rate

causes of inflation

rising incomes, indirect taxes, higher costs of production, currency deprivation, printing money

demand-pull inflation

occurs when the total aggregate demand for goods/services is greater than the total supply of goods/services in which excess demand pulls up price level 

cost-pull inflation

occurs when a rise in the cost of production is passed on to consumers in the form of higher prices.

deflation

a fall in the general level of prices

implications of deflation

consumer spending falls, investment falls during periods of uncertainty, employment falls

implications of using the euro

exchange rate risk is eliminated, transaction costs are eliminated,membership of eurozone encourage international trade.

monetary policy

refers to the actions undertaken by ECB money supply, interest rates and creation of credit within the eurozone.