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What causes cost-push inflation?
An increase in costs of production
What does disinflation mean?
Inflation is positive and price levels are still rising but at a slower rate
Why did inflation in the UK reach as high as 25% in the 1970s?
Rising oil and commodity prices due to wars in the Middle East
What groups of people try to negotiate higher wages for workers, leading to wage-cost inflation?
Trade unions
Define inflation
Inflation is a persistent rise in the average price level in an economy
On the board, draw a diagram to illustrate cost-push inflation
The SRAS curve shifts inward, reducing real GDP and increasing the price level
What do we mean by shoe leather costs?
Consumers have to shop around to find the lowest prices as well as the best interest rates at banks
Why is there an extension along the SRAS curve when there is demand-pull inflation?
Firms have an incentive to supply more as price levels rise
What are some examples of commodities?
Copper, gold, wheat, cotton, natural gas, crude oil
What is the government’s percentage target for inflation to maintain price stability?
2%
What special name do we give to newly-developing economies like Brazil, Russia, India and China?
Emerging markets (aka the “BRICs”)
AD shifts outward, leading to a rise in real GDP and a higher price level
What specific costs of production can lead to cost-push inflation?
Rising wages, rising taxes, rising costs of raw materials and imported components
How can a falling exchange rate lead to cost-push inflation?
A falling exchange rate will make imported components more expensive, increasing production costs
What index is used to measure inflation? Explain what this does.
The Consumer Price Index (CPI) measures the annual percentage change in the price of a basket of goods.
What happens to real GDP during cost-push inflation?
Real GDP decreases because SRAS shifts inward
Why does high inflation lead to income inequality?
Poor households won’t be able to afford basic necessities
Define deflation
Deflation is a persistent fall in the average price level in an economy.
What do we mean by menu costs?
Firms have to pay costs to update their menus, catalogues, signs and websites
How might an economy benefit from demand-pull inflation?
Real GDP increases and unemployment may fall as AD shifts outward
What is shrinkflation?
Producers make their product smaller in order to reduce costs but charge the same price
What is bartering?
Trading goods for other goods
Why might high UK inflation cause a fall in net exports?
UK goods become relatively more expensive so other countries buy fewer UK exports
What is the biggest advantage of deflation?
Households see an increase in purchasing power
What can the government do to reduce demand-pull inflation?
Increase interest rates, which would increase saving, reduce consumption and shift AD inward