Inflation

• 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.