economics inflation

Inflation

A sustained increase in the general price level of goods and services over time, which reduces the purchasing power of money.

Consumer Price Index (CPI)

measure of average change in the prices paid by households for a fixed basket of goods and services over time.

Purchasing Power

The amount of goods and services that a given amount of money can buy (inflation decreases purchasing power)

Real GDP

The total value of goods and services in an economy, adjusted for inflation.

Price Level

The average price of all goods and services in an economy.

Demand-Pull Inflation

Inflation caused by an increase in AD that exceeds the economy's productive capacity.

Cost-Push Inflation

Inflation caused by increases in production costs that reduce AS

Official Cash Rate (OCR)

The interest rate set by the Reserve Bank of NZ

Monetary Policy

Actions taken by the Reserve Bank to influence interest rates, inflation, and economic activity.

Disposable Income

Income remaining after income tax has been deducted.

Productivity

The amount of output produced per worker or per hour worked.

Wage-Price Spiral

When rising wages increase production costs, leading businesses to raise prices, causing workers to demand even higher wages.

Imported Inflation

Inflation caused by rising prices of imported goods or a weaker New Zealand dollar.

Deflation

A sustained decrease in the general price level.

Disinflation

A slowing rate of inflation where prices are still increasing, but at a slower rate than before.

Demand-Pull Inflation chain

Higher consumer spending

↓

Aggregate Demand increases

↓

Price Level increases

↓

Real GDP increases

↓

Demand-pull inflation occurs

Cost-Push Inflation chain

Production costs increase

↓

Businesses produce less

↓

SRAS decreases (shifts left)

↓

Price Level increases

↓

Real GDP decreases

↓

Cost-push inflation occurs

OCR Increases

Reserve Bank increases OCR

↓

Banks increase interest rates

↓

Borrowing decreases

↓

Saving increases

↓

Consumer spending decreases

↓

Aggregate Demand decreases

↓

Inflation decreases

OCR Decreases

Reserve Bank lowers OCR

↓

Banks lower interest rates

↓

Borrowing increases

↓

Consumer spending increases

↓

Aggregate Demand increases

↓

Inflation increases

Causes of Demand-Pull Inflation

Increased consumer confidence

Lower interest rates

Higher government spending

Increased exports

Population growth

Tax cuts

Increased business investment

Causes of Cost-Push Inflation

Higher wages

Higher oil prices

Higher electricity costs

Supply chain disruptions

Natural disasters

Higher import prices

Higher taxes on businesses

how are consumers affected by inflation

Lose purchasing power

how are savers affected by inflation

Savings lose value

how are borrowers affected by inflation

Benefit because loans are repaid with less valuable money

how are lenders affected by inflation

Lose because repayments are worth less

how are workers affected by inflation

May lose if wages don't keep up with inflation

how are businesses affected by inflation

will face higher production costs, reducing profits

how are exporters affected by inflation

May become less internationally competitive if NZ prices rise faster

how are importers affected by inflation

Higher overseas prices increase costs

how are government affected by inflation

May receive more tax revenue but faces higher spending costs

Quantity theory of money

M = Money supply

V = Velocity of circulation

P = Price level

Q = Real output

Quantity theory of money equation

M x V = P x Q