Topic 7: Inflation

A set of flashcards covering key concepts related to inflation, its causes, effects, and measurement, as well as the impact of deflation.

What is inflation?

A sustained increase in the general price level of goods and services in an economy, reducing purchasing power.

What is the difference between inflation and deflation?

Inflation is when prices rise, deflation is when prices fall over time.

What is disinflation?

A slowing down of inflation, where prices are still rising but at a slower rate.

What are the different degrees of inflation?

Creeping inflation (low, steady like 2%), walking inflation (moderate 3-10%), and hyperinflation (extremely high, >50%).

What does the Consumer Price Index (CPI) measure?

CPI tracks average price changes of goods and services households buy, measuring inflation.

What is a limitation of CPI?

CPI has limitations like substitution bias, fixed basket assumptions, and does not reflect regional differences.

What does the Producer Price Index (PPI) track?

PPI tracks average changes in prices received by producers for goods/services, serving as an early inflation indicator.

What is the difference between nominal values and real values?

Nominal values are current prices not adjusted for inflation; real values are adjusted for inflation reflecting true purchasing power.

What is cost-push inflation?

Occurs when production costs rise, prompting firms to increase prices.

What are some consequences of inflation?

Consequences include reduced net exports, unplanned income redistribution, menu costs, and discouraged investment.

What can trigger demand-pull inflation?

Increased consumer spending, government spending, business investments, and a growing money supply.

What is deflation?

A sustained fall in prices, where the value of money increases and each unit buys more.

What are the dangers of deflation?

People may delay purchases, leading to lower consumption, profits, layoffs, and a deflationary spiral.

What are the benefits of moderate inflation?

Moderate inflation can stimulate output, reduce debt burdens, and prevent unemployment due to flexible wage adjustments.

What effect can inflation expectations have?

Inflation expectations can lead to current inflation; adaptive expectations base on past inflation, while rational expectations use all available information.

What factors affect the consequences of inflation?

The cause of inflation (demand-pull vs cost-push), the rate and speed of inflation, and whether the inflation is expected or unexpected.