Inflation

• define inflation


  the annual percentage increase in the general price level
• what are the 3 causes of inflation

  -demand pull

  -cost push

  -inflation expectations
• what changes to cause demand pull inflation

  increases in AD causes increases in the price level
• what 2 things can cause demand pull inflation

  -firms don't have spare capacity to increase output so to meet new demand so raise their prices

  -some simply increase prices as they believe there's more profit available
• what does demand pull inflation look like on a graph

  shifts right in the AD curve

  
• define cost push inflation

  an increase in costs leads to an increase in prices in order to maintain profit margins
• how does commodity prices affect inflation

  global commodity prices increasing means increased costs so increased prices
• what is the wage price spiral

  -firms pay higher wages

  -they raise prices to support this

  -this is inflationary

  -this means they need to pay higher wages

  -the cycle repeats

  • this causes cost push inflation
• how does indirect taxes affect cost push inflation

  firms pay a higher percentage of revenue to the government which means firms are likely to pass on the cost to consumers in order to maintain profit margins
• how does foreign inflation affect domestic inflation

  an increased cost in imports means a firm may have to pass on this cost - imported inflation
• how do exchange rates affect inflation

  a weaker pound makes imported goods more expensive potentially leading to cost push inflation
• what is the main cause of inflation

  the expectation of inflation
• how do expectations of inflation affect inflation levels

  firms and workers take into account future inflation in their deals preemptively putting up prices. this causes inflation because they thought there would be inflation.
• how is inflation a positive feedback loop

  inflation expectations cause inflation. inflation causes further inflation
• define deflation 


  annual percentage decrease in the general price level
• how can deflation be positive 


  in the short term it makes consumers better off as it increases there purchasing power from the same income
• how can deflation be negative

  if consumers and business believe that prices will fall more in the future they may delay spending causing falls in AD leading to further disinflation. this becomes a cycle and can lead to recessions or depressions.
• what is the main consequence of inflation for individuals

  causes spending power to fall as real wages don't raise at the same rate.
• who does inflation often target more

  poorer people as they spend a higher proportion of their income on commodities (volatile to inflation)
• how can pensioners be especially impacted by inflation

  it deteriorates savings as they lose real value which can affect people with large savings as real interest rates fall - pensioners often have large savings
• who can inflation especially benefit

  borrowers as the real value of their loan falls - especially if wages rise due inflation
• what is the main consequence for the economy of inflation

  AD falling due to lower purchasing power - especially for cost push inflation
• how can domestic inflation impact international competitiveness

  if higher than other countries the balance of payment position ca be worsened harming economic growth and employment levels
• how can inflation affect the national debt

  it can cause the value of the debt to fall
• how may investment be effected by deflation

  as confidence falls investment follows. this causes AD to fall as well as a potential shift in LRAS left due to capital goods not being maintained decreasing productive potential
• define disinflation 


  when the rate of inflation is falling- prices increase at a slower rate