Inflation

Front 1

How would you define inflation?

Back 1

A persistent or general rise in the price level in an economy.

Front 2

There are two categories of causes of inflation, what are these?

Back 2

Cost push and demand pull inflation.

Front 3

What is cost push inflation?

Back 3

Cost push inflation occurs when firms increase prices to maintain or protect profit margins after experiencing a rise in their costs of production.

Front 4

What is demand pull inflation?

Back 4

Demand Pull inflation occurs when total demand for goods and services exceeds total supply. This type of inflation happens when there has been excessive growth in aggregate demand and there is an inflationary gap.

Front 5

What are the causes of cost push inflation?

Back 5

Rising imported raw materials costs
Rising labour costs
Higher indirect taxes imposed by the government

Front 6

Cost push inflation is more likely when unemployment is falling to low levels. Why?

Back 6

In these circumstances there will be shortages of skilled labour. This means that businesses may have to offer higher pay to attract and retain their best workers when they are looking to expand their output.

Front 7

It is possible to import inflation. How?

Back 7

Rising imported raw materials costs caused by inflation in other countries.

Front 8

Why would a fall in the value of the Australian dollar on foreign exchange markets contribute to cost push inflation? (HL)

Back 8

A fall in the value of the dollar would mean that import prices would increase as it costs more dollars to purchase the currency of the exporting country.

Front 9

What are the causes of demand pull inflation?

Back 9

A reduction in direct or indirect taxation.
Rising consumer confidence.
Faster economic growth in other countries - providing a boost to Australian exports overseas.
A depreciation of the exchange rate - creases the price of imports and reduces the foreign price of Australian exports.

Front 10

It is argued (by some) that inflation can cause (and is caused by) a wage-price spiral. Why?

Back 10

Price rises can lead to higher wage demands as workers try to maintain their real standard of living. Higher wages over and above any gains in labour productivity causes an increase in unit labour costs. To maintain their profit margins firms increase prices. The process could start all over again and inflation may get out of control. 

Front 11

Inflation can cause a reduction in the real value of savings - especially if real interest rates are negative. What does this mean?

Back 11

Because, if inflation is say 8% but IRs are only 6% then you are actually 2% worse off by saving your money in the bank.

Front 12

Consumers on fixed incomes will lose out with rising inflation. Why?

Back 12

Many pensioners are on fixed pensions so inflation reduces the real value of their income year on year. However, many pensions are index linked.

Front 13

This rise in relative inflation leads to a fall in the world share of Australian exports and a rise in import penetration. Why?

Back 13

Prices of exports become more expensive to the importing country. In the short term, imports are cheaper. However, the exchange rate change due to the reduction in exports (less demand for dollar) will result in a weak $ and therefore expensive imports.