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12 Cards in this Set
- Front
- Back
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Identify the main FOUR causes of inflation. |
1. Demand-pull inflation. 2. Cost-push inflation. 3. Inflationary expectations. 4. Imported inflation. |
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Define demand-pull inflation |
Demand-pullinflation derives from the concept that prices are determined by theinteraction of demand and supply In the market place. Demand-pullinflation occurs when aggregate demand exceeds the economics productivecapacity, prices rise as output cannot expand any further in the short term.These prices rise as consumers bid against one another for the limited goodsand services available. |
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Draw graph + explain |
Demand pull inflation graph DRAW OE |
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Outline the cause of cost push inflation |
Outline the cause of cost push inflation. Cost pushinflation is cuased by an increase in the costs of the factors of production(e.g. oil price or wage increases). When theses costs of production rise, firmswill attempt to pass them on to consumers through raising the prices of theproducts. |
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Provide an example of CP Inflation |
o Whenwages increase faster then productivity growth, the cost of labour for eachunity of output increases, labour accounts for 60% of a firms costs andtherefore they will pass on the wage increase to customers to maintain profits. |
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Sketch and explain 9.4 (essay for cost orexpectations) |
SKETCH OE |
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Identify inflationary expectations |
Inflationaryexpectations derive from the concept that if individuals expect a raise in prices in the future (higher inflation)then they will increase their spending. |
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Outline the 2 forms of inflationary expectations |
1. When consumers expect a futureincrease in prices they will tend to purchase as many as possible before pricesincrease. With an increase in demand and purchases, consumption will increaseand therefore result in a higher “DEMAND Pull inflation”. 2. If employees expect inflation toincrease they will take this into account when negotiating wage increases.Employees who expect a higher inflation will ask for a higher wage rise topreserve the purchasing power of their wage. – Lead to cost push inflation. |
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Outline "imported inflation" |
o Typeof inflation that is transferred to Australia through internationaltransactions. o Risingimport price – most prominent case. o Anincrease in the price of imported goods will increase the inflation rate in thesame way as domestically produced goods. Depreciation will also lead toinflation. o Ifthe importers face competition from locally made products they may reduce theirproduct margins and not pass on to consumers the full effect of overseas priceof depreciation. |
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identify the other 2 causes |
1. Government policies. 2. Excessive increases in the moneysupply. |
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Outline government policies - inflation Cause |
o Increasingindirect tax. E.g. increase in government excise on tobacco products increaseprice hugely. o Deregulatingan industry, changing tariff rates, imposing price controls. |
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Discuss Excessive increases in the money supply. - inflation cause |
o Whenincrease in the money supply outstrips the growth rate, an increase volume ofmoney chases the same amount of goods and services. |
