Inflation

• Inflation


  A sustained increase in the general price level
• Demand-pull Inflation


  Increase in AD pulling general price levels up leading to inflation.

  LRAS DIAGRAM
• Cost-push inflation


  Higher costs lead to a decrease in SRAS which then push up price levels and causes an increase in inflation.

  SRAS DIAGRAM
• Deflation


  A sustained decrease in the general price level
• Detflationary Spiral


  Deflation leads to consumers deciding to save their money in order to wait for prices to decrease further. This repeats causing AD and Real GDP to decrease.
• Benign Deflation


  A decrease in general price levels caused by a decreases in costs which leads to an increase in SRAS. Increases Real GDP, economic growth.
• Malignant Deflation


  Reduction in AD which decreases confidence in producers and consumers. This causes a decrease in consumption which causes firms to further decrease their prices however consumers will further save their money to wait for prices to fall even further down. This causes a deflationary spiral.
• Nominal Income


  The actual income.
• Real income


  How much the income is worth.
• Finding UK Price Levels

  Stage 1 - the Office of National Statistics conducts its Living Costs and Food Survey. This involves interviewing 7000 households to find the 650 most common goods and services and to find the percentage of their spending goes on each of these goods and services.

  Stage 2 - the ONS conducts a price survey where they collect prices of these 650 goods from across the UK in order to find the average price of each good.

  Stage 3 - a weighted average of all the prices is calculated in order to find the price level.