| What is Cost Push Inflation? | -Inflation is caused by Rising Costs of Production, such as Oil.
-These rising costs will make Firms pass the Higher Cost in the form of a Higher Price. This is shown on a AS AD diagram where AS goes to the Left |
| Explain how Rising Wages can lead to Cost Push Inflation | If wages makes a large % of Firms Costs, then this mean Prices can rise noticably. Prices rises means that Further Wage Demands may be needed, leading to Pricer Increases [Wage-Price Spiral] |
| Explain how a Rise in Imported Raw Materials leads to Cost push Inflation | If Inputs acorss the Globe rise, Firms may have to Pay more and give Higher Prices. This can also happen if a Currency Weakens in Value |
| Explain how a Rise in Indirect Taxes leads to Cost Push Inflation | If Indirect Taxes rise then the Cost of Producing becomes more. This is influenced to how Price Inelastic the Good is |
| What is Demand pull Inflation? | -This is Inflation via Large Growth in AD compared to Supply. This makes AD Shhift to the Right making Sellers raise the Price more |
| How can high Consumer Spending, or High Demand for Exports lead to Demand pull Inflation | -Higher Spending, perhaps from High Confidence in their Employment [Low Unemployment] or Low Interest rates will ecnourage Spending and Borrowing. AD Shifts causing Inflation
-Foreign Demand for Exports can also cause by Rapid Economic growth in other Nations [AD still shifts] |
| How can the Money Supply being Faster than Output lead to Demand Pull Inflation | -If the Money Amount doesn’t Match the Output of goods and Services [Too much Money chasing too few goods]
-This leads to Prices Rising. This may happen when Interest Rates are too Low. Monetarist Economists believe this is the Biggest Cause of Inflation |
| How can Bottleneck Shortages lead to Demand Pull Inflation | -If Demand grows Fast when Labour and Resources are already Full Used, then Output leads to Shortages [Positive Output Gap] This causes Prices to Rise and Firm’s Cost to INcrease
-Price rising from Shortages in an Area of the Market can manfiest itself in other Markkets leading to General Inflation |
| What is the Fishers Equation of Exchange? | MV=PT
-This is where M = Money Supply (Amount in an Economy) and V (Speed at which Money is Spent)
-This is where P = Price Level and T = Total Amount of Transaction in the Economy |
| What would Monetarists, using the Fishers Equation, argue about how Inflation would be Combatted?
-What would Critics say? | -In the Short Run, V and T will probably not change, so any increase in P is Directly Caused by P. Because both sides are meant to Equal each other, any % in P is = any % in M
-To Avoid Inflation, therefore, Monetarists will argue that the Money Supply must be Strictly Controlled
-There is evidence to suggest that the Theory is good for Explaining High Inflation Levels, but for more modest ones, it is quite Ineffective |
| What are the Costs and Consequences of Inflation | -Inflation will have Standard of Living on those with Fixed [ish] Incomes to Fall - Bigger on Lower Income or Benefits
-Country’s Exports will be more Expensive and Imports Cheaper. This can increase Unemployment and create a Deficit in the Balance of Payment
-Saving is pointless as the Value always falls so it is more attractive to Spend - which just leads to more Inflation
-This means [Less Saving] that funds for Borrowing and Investment decreaases which means Firms can’t Improve. Interest rates going Up [Combat Inflation] also Reduced Investment which can create Uncertainity for Firms |
| What is Shoe-leather Costs? Why does it tie to Inflation? | -These are the costs of the Extra Time and Effort done by Consumers to find the Best up to date Prices of the Goods and Services
-Inflation makes it harder for Consumers to find the best Price as it can Increse in different % in different Firms |
| What are Menu Costs? | -These are Costs to Firms for the constitent Change of the Price Infromation, which during Inflation, can be quite Annoying as well |
| What is Hyperinflaton? | -This is when Inflation becomes Extreme and grows to Obsurd Levels [100%+]
-This usually happens when Governments create too much Money [War or other Crisis] |
| What is Deflation? | -This is when the Rate of Inflaation goes below 0% and Prices actually Fall
-Deflation hints the Economy is not doing well as it comes from falling AD and Employment levels |
| Apart from AD Falling and Unemployment rising, how else can Deflation come around? | -Deflation can come if Firm’s Costs will Fall, meaning the Price can fall as well. This is generally Positive |
| Why is Deflation bad? | -Hoarding is Boasted as Consumers will delay their Purchases in expecting Prices to Fall. This leads to Consumption falling, which means Firms have to Lower Prices. Japan’s Consumer Spending fell by 1.7% from 1997-2003
-Doom loop of falling Prices and Wages. Firms may have to lower Wages as Prices are forced to Tank as Profits are not High enough.
-Central Bank can’t use Interest Rates [If already low] to encourage Consumption and thus traps the Economy in a Liquidity Trap |
| Why does the UK want Inflation at 2%? How does it achieve this [Summarise] | -Bank of England sees 2% Inflation as Low and Stable enough. Above or Below may cause Problems
-Governments will use Monetary Poliy, Fisical Policy or Supply-side Policy to acieve this
-But trade offs may have to be made between Inflation and the other Economic objections. Monetarists believe bringing Inflation down in the short term helps the Govenrment in the long term for the other Objectives |
