Inflation

Inflation

An increase in the general level of prices for goods and services in an economy

Deflation

A decrease in the general level of prices for goods and services

Disinflation

An increase in the general level of prices but at a rate lower than the period before

Hyperinflation

A very rapid rise in the price level; an extremely high rate of inflation.

Stagflation

A period of slow economic growth and high unemployment (stagnation) while prices rise (inflation)

Core Inflation

The underlying increases in the price level after one off price increases and volatile food and energy prices are removed.

Headline inflation

Measure of inflation that includes all of the goods that the average consumer buys

Nominal GDP

The production of goods and services valued at current prices (the year it was made or sold)

Real GDP

Nominal GDP adjusted for inflation

Nominal Wages

The dollar amount of wages paid in current year dollars (the year they were paid or earned)

Real Wages

Wages adjusted for inflation

Boom/Peak

A period of prosperity in a business cycle in which economic activity is at its highest point.

Expansion Phase

That part of the business cycle in which the nation's GDP is on the rise, the number of available jobs is growing, the unemployment rate is falling, and the national income is expanding.

Recession

A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

Depression/Trough

A long and severe recession in an economy or market - the lowest point in the Business Cycle

M (in quantity theory of money identity)

Money Supply - The value of money in circulation - including notes and coins and money in banks.

V (in quantity theory of money identity)

Velocity of Circulation - The rate at which $1 is spent

Total Spending

M x V

P (in quantity theory of money identity)

Price level - the average price of goods and services in the economy

Q (in quantity theory of money identity)

Real output - the amount of goods and services produced by an economy

Total Value of Production

P x Q

Quantity Theory of Money (Crude)

An increase in M when V and Q are held constant will lead to an increase in P (the price level)

Aggregate Supply

The total supply of goods and services in an economy

Aggregate Demand

The total demand for goods and services in an economy

Cost-Push Inflation

Inflation caused by a decrease in Aggregate Supply and shift of the AS curve to the left. Results in a increase in the price level (PL) and decrease in output (Y).

Demand-Pull Inflation

Inflation caused by an increase in Aggregate Demand and a shift of the AD curve to right. Results in increase in the price level (PL) and increase in output (Y).

Components of Aggregate Demand

Consumption (C), Investment (I), Government Spending (G), Net Exports (X-M)

Aggregate Demand Calculation

AD=C+I+G+(X-M)

Monetary Policy

Government policy that attempts to manage the economy by controlling the money supply and interest rates (through the OCR).

Fiscal Policy

Government policy that attempts to manage the economy by controlling taxing and Government spending.

Official Cash Rate (OCR)

Sets the bottom line for all interest rates used by banks, effectively regulating the retail interest rates i.e. the cost of borrowing/opportunity cost of holding money

Inflation Wage Spiral

Inflationary expectations cause consumers to demand higher wages which causes prices to increase which causes consumers to demand higher wages etc. etc.

Wealth effect

The tendency for people to increase their consumption spending when the value of their financial and real assets rises because of inflation.

Fiscal Drag

People's income being dragged into higher tax bracket as a result income increasing inline with inflation but tax brackets not being adjusted in line with inflation