Inflation refers to the rate at which prices for goods and services increase over time.
Inflation is measured using the Consumer Price Index (CPI) which tracks % changes in the average price level of the basket of goods.
The consequences of inflation is:
It erodes the value of money
Causes capital flight
GDP slows down.
2 ways to fix inflation is to increase interest rates and direct taxes.
Stagflation refers to slow economic growth with rising unemployment and inflation.
Fisher's Quantity Theory of Money is that more money means more spending so there is an increase in demand for goods and services. Real output will remain constant.
Fisher's Quantity Theory of Money equation is: MV = PQ.
M = money supply
V = velocity of money
P = price level
Q = quantity of goods and services produced.
Fisher's velocity of money refers to the rate at which money is exchanged in an economy.
Shrinkflation refers to reducing the quantity of a product and keeping the price the same. Also known as 'hidden inflation'.
Greedflation is when sellers increase prices excessively in response to a situation of increased demand.
Losers of inflation are low paid workers.
Winners of inflation are those with debt because the value decreases and becomes easier to pay back.
2 types of deflation are benign and malign deflation.
Benign deflation is good because supply increases and prices go down.
Malevolent deflation is bad because demand decreases and prices go down.
Factors that cause benign deflation are a decrease in minimum wage, import prices and commodity prices. Increase in the exchange rate because imports become cheaper and a fall in business tax.
Factors that cause malevolent deflation are an decrease in AD, higher interest rates, lower investment and a balance of payments deficit.
Cost push inflation and demand pull inflation happen because of a depreciation in the exchange rate so the pound gets weaker. This is bad for domestic and good for foreign countries.
Cost push inflation is when costs have increased because we can buy less with the same amount of money. Supply decreases and costs increase.
Demand pull inflation is in foreign countries, demand increases because their prices have decreased and they can buy more goods.
Cost push causes supply to decrease. Demand pull causes demand to increase.
Demand-pull inflation is caused by increases in aggregate demand outstripping aggregate supply.