Inflation

What is Hyperinflation?

A period of very rapid increases in the overall price level.

What are the two types of inflation?

Expected Inflation and unanticipated Inflation

What are some costs and consequences of anticipated inflation?

Fiscal Drag - As inflation occurs, higher income earners have to give up a larger proportion of their income to tax Menu Costs - The cost of changing prices can create demand deficiencies. Fixed Income Earners: Owners of assets with fixed income will have their real yields eroded, as they will lose value for their money

What are some costs and consequences of unanticipated inflation?

High Monetary Policy - Central Bank authorities will have a hard time implementing monetary policy, consumers will have a hard time understanding what to do with their money Money Illusion - Consumers may fail to realise the real change to the value of their money, and might continue to spend the same nominal amount. Unintended redistribution of income and wealth.

What is the formula for the economic process underlying inflation?

Inflation = Inflation Expectations - Magnitude(Unemployment - NRU) + Supply Shocks

What is inflation?

Inflation is a sustained increase in the general price level within an economy.

How is inflation measured?

Inflation is measured as a change to the consumer price index or the CPIH which includes housing costs.

What is the CPI?

The CPI uses a basket of goods and services as a measure of the average price level. It uses a set of goods and services which are meant to reflect the consumption of an average household. However, it excludes a lot of key housing costs. It is chained in an index through the geometric mean.

What is the RPI?

The RPI measures the change in a fixed set of retail prices for goods and services which are intended to reflect normal household spending. it also includes key housing costs such as interest payments, buildings insurance and council tax. It uses the arithmetic mean.

According to the classical view, what is pure inflation?

The classical view assumes that changes in price are equiproportional, across goods and factor markets, and that output is always at full employment. Pure inflation would be when goods and factors change at the same rate