Inflation

• What is the definition of inflation?

  Sustained rise in prices
• Demand-pull inflation occurs when aggregate demand exceeds supply
• Cost-push inflation is caused by an increase in production costs.
• What is one demand-side factor that causes inflation?

  Increase in aggregate demand
• An increase in wages can lead to higher production costs
• How does exchange rate depreciation affect inflation?

  Increases import prices
• Inflation reduces the purchasing power of consumers.
• What is one consequence of inflation for consumers?

  Uncertainty about spending
• For firms, inflation leads to increased costs of inputs
• Ordering of the relationship between inflation and unemployment according to the short-run Philips curve

  1️⃣ Inflation increases

  2️⃣ Unemployment decreases
• In the long run, the economy returns to the natural rate of unemployment.
• What is one tool used in monetary policy to control inflation?

  Interest rates
• Supply-side policies aim to reduce inflation by increasing productivity
• How do inflation expectations influence current inflation?

  Adjusting behaviour
• If people expect prices to rise, they may increase their wage demands.