4.8 inflation and deflation at University of Birmingham

Flashcards and summaries for 4.8 inflation and deflation at the University of Birmingham

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imported inflation 

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deflation 

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reasons a government allows money supply to expand (3)
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costs of inflation in an economy (3)

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governments may introduce direct control on some prices and wages by: (3)

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expenditure patterns change due to: (3)

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nominal income 
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the rate at which prices in an economy are rising may be reduced by: (4)

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stagnation 

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demand-pull inflation 

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cost-push inflation 
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consequences of deflation (9)

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Exemplary flashcards for 4.8 inflation and deflation at the University of Birmingham on StudySmarter:

4.8 inflation and deflation

imported inflation 
imported inflation is a general and sustainable price increase due to an increase in costs of imported products 

4.8 inflation and deflation

deflation 
deflation is a general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy 

4.8 inflation and deflation

reasons a government allows money supply to expand (3)
  • to increase total demand in and economy during an economic recession in an attempt to reduce unemployment 
  • in repsonde to an increase in demand for goods and services from consumers and firms 
  • in response to workers demand for higher wages, or a rise in the other costs of production 

4.8 inflation and deflation

costs of inflation in an economy (3)
  • it imposes additional costs on firms 
  • it reduces the competitiveness of exports 
  • its creates economic uncertainty 

4.8 inflation and deflation

governments may introduce direct control on some prices and wages by: (3)
  • limiting the rate at which public sector wages can increase each year below the rate of inflation, this reduces real disposable incomes and spending power of public sector workers 
  • limiting the prices which firms can charge in markets regulated by the government 
  • limiting the rate at which regulated firms can increase their prices, this can help to reduce price inflation 

4.8 inflation and deflation

expenditure patterns change due to: (3)
  • changes in taste and fashion
  • the introduction of new goods and services 
  • the changing composition of the population and household due to migration, changes in birth and death rates and later marriages 

4.8 inflation and deflation

nominal income 
nominal income is the part of a salary which is paid out in cash 

4.8 inflation and deflation

the rate at which prices in an economy are rising may be reduced by: (4)
  • the government announcing it has a long term inflation target 
  • demand-side policies that reduce total demand or slow down the rate at which total demand is growing 
  • supply-side policies that boost the rate of growth in output 
  • direct controls that limit public sector wages and prices of regulated markets 

4.8 inflation and deflation

stagnation 
stagnation is a prolonged period of little or no growth in an economy 

4.8 inflation and deflation

demand-pull inflation 
demand-pull inflation is the upward pressure on prices that follows a shortage in supple as total demand in an economy increases 

4.8 inflation and deflation

cost-push inflation 
cost-push inflation occurs when overall prices increase due to increases in the cost of wages and raw materials 

4.8 inflation and deflation

consequences of deflation (9)
  • consumers will delay many spending decisions as they wait for prices to fall further 
  • stocks of unsold goods accumulate, so firms cut their prices and this reduces their profits and incentives to invest 
  • firms cut their production and reduce the size of their workforce 
  • household incomes fall as unemployment rises 
  • the value of debts held by people and firms rise in real terms as prices fall and this omcreses the burden of loan repayments
  • firms stop investing in new plant and machinery as demand falls and the cost of borrowing rises 
  • the real cost of public spending rises but revenues fall as economic activity slumps, this means the government must borrow more money 
  • eventually the economy goes into a deep recession as demand, output, demand for labour and incomes continue to fall 
  • many firms go out of business because they are unable to make any profit as consumers continue to delay their spending further 

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