H2 Economics: Inflation and Deflation Lecture Notes

A set of vocabulary flashcards covering the concepts, causes, consequences, and policies related to inflation and deflation, specifically tailored for H2 Economics.

Inflation

The sustained increase in the general price level (GPL) of an economy, over a period of time, usually a year.

General Price Level (GPL)

The average price of goods and services in an economy.

Deflation

The sustained decrease in the general price level (GPL) of an economy, over a period of time, usually a year.

Purchasing Power of Money

The amount of goods and services that money can buy, also known as the value of money; it falls as inflation rises.

Real Values

Values where the effects of inflation have been eliminated, calculated using the formula: $\text{\% } \Delta \text{ Real Value} = \text{\% } \Delta \text{ Nominal Value} - \text{Inflation Rate \%}$.

Consumer Price Index (CPI)

An index that represents the general price level (GPL) of a fixed basket of goods and services consumed by households, used to compute the inflation rate.

Mild Inflation

A slow increase in the general price level (GPL) with an inflation rate of about $2-3\%$ per annum.

Moderate Inflation

A modest increase in GPL, usually featuring single-digit inflation rates above $4\%$ per annum that are considered stable for households and firms.

High Inflation (Galloping Inflation)

A large increase in GPL, usually with double or triple-digit inflation rates above $10\%$ per annum, causing people to avoid holding cash.

Hyperinflation

Rapid, uncontrollable, and large increases in GPL, where the rate can reach $1000\%$, $1 \text{ million} \%$, or more per annum.

Stagflation

A period of slow or no economic growth, known as stagnation, accompanied by a high level of inflation.

The Wage Price Spiral

A continuous increase in the general price level spurred by a cycle where rising wages increase production costs and demand, leading to further price increases.

Disinflation

A reduction in the rate of inflation where prices are still rising but at a slower pace than before.

Demand-pull Inflation

Inflation caused by persistent increases in aggregate demand (AD) when the economy is operating near or at the full employment level of real national income.

Cost-push Inflation

Inflation caused by a sustained increase in the cost of production, leading to a persistent fall in aggregate supply and an increase in GPL.

Wage-push Inflation

A type of cost-push inflation where a rise in wages not matched by increases in labour productivity leads to higher unit costs of production.

Imported Inflation

Inflation caused by a rise in the price of imported factor inputs due to global price increases or the depreciation of the domestic currency.

Menu Costs

Costs incurred by firms when they must frequently adjust prices during high inflation, such as reprinting price tags, menus, or catalogues.

Credit Crunch

An economic scenario in which banks tighten lending requirements and reduce access to credit, causing AD and prices to fall.

Paradox of Thrift

A situation where people increase personal savings and cut back consumption during a recession, reducing AD and potentially leading to deflation.

Deflationary Trap

A state of persistent deflation where nominal interest rates are at $0\%$ and real interest rates remain high, making conventional monetary policy ineffective.

Real Interest Rate

The interest rate adjusted for inflation, defined as $\text{Real interest rate} = \text{Nominal interest rate} - \text{inflation rate}$.

Gradual and Modest Appreciation (GRAMA)

The exchange rate policy adopted by the Monetary Authority of Singapore (MAS) to reduce imported inflation and promote price stability.

Income Policy

Government measures, such as those provided by the National Wage Council (NWC), aimed at controlling the growth of wages to prevent them from rising faster than productivity.

Productivity and Innovation Credit Scheme (PIC)

A program in Singapore where businesses enjoy $400\%$ tax deductions or up to $60\%$ cash payments for investments in productivity and innovation.