Inflation

Front 1

What’s inflation

Back 1

this is a persistent increase in the general price level over a given period of time

Front 2

Why do we calculate inflation

Back 2

This is to measure the cost of living in a country. For example, a higher inflation increases the cost of living and life becomes more expensive

Front 3

Name two methods to calculate inflation

Back 3

1) RPI

2) CPI

Front 4

List steps of measuring inflation

Back 4

1) selection of the base year

2)sampling of basket goods which may be representative of all goods in the economy

3) finding out how households spends their money. The weighing on their expenditure across different goods

4) record how price changes . This is the % chance in price of goods in the basket

5) working out the weigheted price index. Which is W x change in price

6). Calculate the general change in price

Front 5

Name causes and types of inflation

Back 5

a) demand pull inflation

b) cost push inflation

c) monetary inflation

Front 6

What’s demand pull inflation

Back 6

This is a type of inflation caused by an increase in the AD more than AS

Front 7

Formula of AD

Back 7

C+I+G+ (X-M)

Front 8

What’s happens in the short run

Back 8

In the short run an economy operates below its full capacity this means an economy has more room to increase production

Front 9

What happens in the long run of demand pull inflation

Back 9

This is when an economy operates at its full capacity. This means there is no more room to increase production. Since all resources at fully employed

Front 10

What’s cost push inflation

Back 10

This is inflation caused by an increase in the cost of production

Front 11

What happens in the short run of cost push inflation

Back 11

A fall in AS

Front 12

What happens in the long run of cost push inflation

Back 12

Back (Definition)

Front 13

What’s monetary inflation

Back 13

This is a type of inflation caused by an increase in the money supply. For example printing currencies

Front 14

Explain monetary inflation

Back 14

This is a type of demand pull inflation since when there is an increase in money supply it leased to an increase in the AD due to a rise in income levels in an economy more than AS.

Front 15

How is price and money correlated

Back 15

Money and supply are directly proportional. Therefore, and increase in money supply will cause an equal percentage increase in price.

Front 16

Advantages of inflation

Back 16

1) encourage expansion and increase in output. Since an increase in price will motivate production

2) reduces the cost of borrowing since real interest rate will fall with inflation

3) encourages spending in investment since firms can cover the cost of production especially during the short run of demand pull inflation

4) reduces the burden of debts

Front 17

Disadvantages of inflation

Back 17

1) shoe leather costs.this is the cost of looking for cheaper prices during inflation.

2) menu cost. This is the cost which involves the changing of prices during inflations

3) Inflation tends to discourage investment. This is because of the uncertainty and confusion that is more likely to occur during periods of high inflation

4) reduces purchasing power and makes money income worthless, this increases the cost of living

5) Fall in real wages. , high inflation can lead to a fall in real wages. If inflation is higher than nominal wages, then real incomes fall

Front 18

Def of deflation

Back 18

This is a sustained fall in the general price level sitting a given period of Time

Front 19

Def of deflation

Back 19

This is a sustained fall in the general price level sitting a given period of Time

Front 20

Adv of deflation

Back 20

1) fall in the cost of living. Since there will be an increase of the purchasing power and increase in the value of money

2) discourages high demand for high wages since it reduces cost of production

3) increase deman of goods which will increase investment

4) the real profit increases because the value of money increases

Front 21

Negative effects of deflation

Back 21

1) discourages production and supply

2) reduces the ability to cover up the cost of production

3)unemployment due to a fall in AS