Flatio Inflation In The UK Economy

Register to read the introduction… As a result of this, real output will shift from to P to P1. A lack of disposable income will arise from the people who have lost their jobs and will therefore demand less goods and services. Moreover, this can also lead on to the knock on affect of a loss of jobs in other areas of the economy due to there being a deficient demand. The government will then as a result of this increase expenditure as capital expenditure will increase on welfare benefits, which will mean that money cannot be spent on other supply side policies, resulting in a trade of a damaging the long run growth of AS.

In addition to this, public confidence will deteriorate which will also lead to a reduction in AD. With consumers having less confidence, they will be less likely to invest and more likely to save as they will feel as if the economy is unstable and heading towards a recession. Likewise, productivity will fall as employees will be demotivated and feel under the pressure of redundancy and unemployment. This will therefore increase government expenditure and deteriorate the government’s budget. …show more content…
On the above diagram because AD has decreased to AD1 the price level has also decreased to P2. This has therefore reduced inflationary pressure. This is beneficial for the UK economy, because exports will increase due to the average price of goods and services manufactured in the UK decreasing. As a result employment may increase in the private sector as stated in extract C because private sector will invest in capital to increase supply. This is beneficial for the UK economy because the UK’s balance of payments on current account will decrease due to an increase in exports. This is an injection into the circular flow of income and will in the long run increase domestic income, thereby increasing