Consequences of inflation for individuals and Consequences of deflation

inflation

a situation of a sustained increase in the general price level in an economy. The cost of living rises as the cost of goods/services that we buy are rising.

2%

What is the Bank of England’s inflation target?

uncertainty

what is the issue with inflation?

income, savers, borrowers, income equality, international competitiveness, business confidence, menu/show-leather costs, function of money

what are the major impacts of inflation?

income/wages

when inflation outpaces wage growth, employees experience a reduction in buying power raising demand for higher wages

savers

inflation reduces value of __________

borrowers

allows ____________ to pay lenders back with money worth less than when it was originally taken.

income inequality

changing the ‘relative weight’ of wealth and skill heterogeneity, governed by the ratio of interest to labour income

international competitiveness

stronger pound, imports cheaper, exports dearer

business confidence

high and volatile inflation is not good for ____________ ____________ partly because they cannot be sure of what their costs and prices are likely to be.

shoe-leather costs

some consumers take more trips to the bank during high inflation

menu costs

this increases as firms face higher costs with updating prices in their shops

function of money

weaker purchasing power with inflation

good deflation, beign

when there is an improvement in supply side of an economy. Costs of production are lower but output and employment rise.

bad deflation, malign

might be seen in a recession. AD collapses, made worse by a negative multiplier and possibly worsened by a credit crisis. Employment and output both fall with a decrease in prices

negative multiplier, credit crisis

bad deflation is made worse by a

Employment, output

in bad deflation, __________ and ______ both fall with a decrease in prices