AQA Economics A-level Macroeconomics: Economic Performance (Inflation and Deflation)

These flashcards cover key concepts regarding inflation, deflation, their causes, effects on consumers and businesses, and core economic equations related to these phenomena.

What is inflation?

Inflation is the sustained rise in the general price level over time, leading to increased cost of living and decreased purchasing power.

What is deflation?

Deflation is the opposite of inflation, where the average price level in the economy falls, leading to a negative inflation rate.

Define disinflation.

Disinflation is the falling rate of inflation, meaning the average price level is rising, but at a slower rate.

What can trigger demand pull inflation?

Triggers include a depreciation in the exchange rate, fiscal stimulus, lower interest rates, and high growth in UK export markets.

What factors can lead to cost push inflation?

Factors include rising commodity prices, increased labor costs, expectations of inflation, indirect taxes, and monopolies.

How does inflation affect consumers?

Inflation hits low and fixed income consumers hardest, reduces real value of debt, and raises costs for necessities.

How do firms respond to inflation?

Firms may face higher borrowing costs, demand for higher wages from workers, and may become less price competitive.

What are the effects of deflation on spending?

Deflation discourages spending as consumers anticipate lower prices in the future, potentially leading to economic decline.

What is Fisher’s equation of exchange?

Fisher's equation of exchange is represented by MV = PQ, where M is the money supply, V is the velocity of circulation, P is the price level, and Q is the quantity of goods sold.

What happens when the money supply increases according to the Quantity Theory of Money?

An increase in the money supply at a faster rate than national income leads to inflation.

What is the real value of money during deflation?

The real value of money increases during deflation, as consumers can buy more with the same amount of money.

How does deflation impact real interest rates?

In a deflationary environment, even with a nominal interest rate of 0%, the real interest rate can increase, leading to a higher effective rate of return on savings.