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20 Cards in this Set
- Front
- Back
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Inflation |
The percent change in average prices in an economy over a period of time |
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What a country want? |
Low Inflation --> higher purchasing power of a given sum of money |
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Consumer Price Index (CPI) |
Market basket of goods relative to same basket during benchmark |
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Retail Price Index (RPI) Eg |
Mortgage, council tax, house depreciation, building insurances, housing costs |
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Difference between RPI and CPI |
Retail price index will take into account what CPI doesn't such as housing costs |
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Inflation (easy) |
Prices are rising |
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Disinflation |
Inflation is slowing down |
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Deflation |
Prices are dropping |
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Two types of inflation |
Demand pull inflation Cost push inflation |
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Demand Pull Inflation |
Caused by more demand in an economy relative to supply (excess demand) |
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Shoe Leather Costs |
Firms and consumers Have to look for alternative suppliers due to inflation |
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What is demand pull caused by... |
Rising consumer spending (tax cuts and low interest rates) Increase in government spending Rising demand for resources (firms) Booming demand (exports) |
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When will demand pull inflation most likely occur? |
When an economy is close to full employment, as aggregate demand is rising therefore more workers are needed |
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Cost Push Inflation |
Inflation caused by rising business costs such as labour and raw materials |
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Menu Costs |
Costs to firms having to make repeated price changes |
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What causes cost push inflation? |
Increased wages (trade unions) Increased cost of production Rising Taxes Rising costs of imported goods (oil) |
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Cost Push effects on employment |
Reduces unemployment Firms want to sell more More workers |
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Cost push effects on wages |
Have to rise Workers need more money So they can afford the general standard of living |
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Cost push effects on exports |
If price rises it is difficult to sell in overseas markets. Go out of businesses. Cyclical effect |
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Why is a sustained rate of inflation important to a countrys economic growth? |
It drives up consumer spending as they expect prices to increase. Therefore theyd spend more before prices rise further therefore more gdp |
