inflation

• what is inflation?

  persistent tendency for the general price level to rise. current UK government target for inflation is 2% per year in the consumer prices index. inflation is measured by the percentage change in the index compared with the same month 1 year ago
• what are the 3 causes of inflation?

  demand pull, cost push and monetary growth
• what is demand pull cause of inflation?

  caused by ongoing increases in aggregate demand. when aggregate demand continues to increase when the economy is at or close to full employment. Excess demand initiates inflationary pressure. Firms respond by increase prices and production. Associated with a booming economy, during a recession demand pull inflation will be low.
• whats cost push inflation?

  caused by constant rising costs of production. firms respond by rising their prices and producing less. the extent of the increase in price depends on the ability of the firms to pass on the rising costs to consumers
• what is monetary growth inflation?

  when the money circulating in the economy increases faster than the rate of growth of output this leads to inflation. based on the quantity theory of money
• what are the 3 effects of inflation?

  redistribution, administrative and international effects
• what is the redistribution effects of inflation?

  not everyone can have income matching inflation e.g., pensions rely on the gov to increase
• what are the administrative effects of inflation?

  higher inflation means wages and prices have to increase. higher prices mean more admin tasks such as menus reprinted with new price
• what are international effects of inflation?

  Trade imbalances and higher inflations compared to other countries means online global shopping increases
• what is the UKs current inflation policy?

  Bank of England's monetary policy committee adjust the interest rate to meet the inflation target. this is a form of monetary policy aimed at influencing the level of aggregate demand.

  • raising interest rate raises the cost of borrowing by firms and households and discourages borrowing and spending.
  • lowering interest rates lowers the cost of borrowing for firms and households and encourages borrowing and selling.
• what is the similarity between demand pull and cost push inflation to the labour market and inflation?

  a. the closer the economy is to full employment, the greater the inflationary pressure.

  b. the greater rate of unemployment, the lower the inflationary pressure