Inflation

Go into detail as to why these are problems.

- A basket of goods must represent the consumption bundle of the average household, however, consumers have diverse tastes for goods and services thus so will their household. - Different tastes mean that consumers will hold more importance to certain goods and consume them in different quantities; more income will be devoted towards the good household values the most. - price changes may not be uniform in all regions within countries; especially those with a larger geographical span.

How does inflation affect unemployment?

According to the Phillips curve ....

How does one determine the price level?

By using an appropriate price index, typically the (CPI) consumer price index.

How does Inflation affect income distribution?

Consumers with fixed incomes are affected more than those who can adjust their earnings in response to inflation in order to avoide a decrease in purchasing power. (Pensioner vs entrepreneur)

How does Inflation affect growth?

This causes a divergence between nominal income and the price level, if income grows slower than the price level this implies real income is on the decline.

Name the 4 types of inflation

1. Cost Push Inflation 2. Demand pull inflation 3. Monetary Inflation 4. Multi-Casual Inflation

How does inflation affect the balance of payments?

A deficit can develop; imports increase as consumers switch to cheaper foreign substitutes to a avoid high local prices and exports decline as the higher prices make it har for domestic firms to compete in foreign markets.

Define Cost push inflation

Cost push inflation occurs when I when a rise cost of production causes an increase in the prices of goods and services, the heightened cost is then passed on to consumers. This can especially happen when firms practice mark up pricing; fixing prices on unit cost + profit basis; this allows firms to maintain their profit margins.

Inflation's affects on the functions of money: Standard of deferred payment

Debtors benefit as the real value of money they borrowed falls; creditors suffer as the real value of what was lent declines due to inflation.

Define Demand pull inflation

Demand pull inflation; this occurs when aggregate expenditure exceeds the full employment level of output which creates an inflationary gap. This means consumers are trying to purchase more goods than the economy can produce as all resources are being fully employed. This inflates prices.

What is inflation?

Inflation can be defined as a sustained increase in the general or average level of prices which causes an erosion in purchasing power.

How does Inflation affect Investments?

Inflation creates uncertainty about future prices; it increases investment risk as it is difficult to estimate yield on potential investments which discourages private investment.

Inflation's affects on the functions of money: Unit of Account

Inflation means prices are unstable and it is difficult to establish a constant value of goods and services over time. As prices change the relative value of goods and services are distorted.

Name the three problems with using CPI

Items in basket differ from house hold to house hold Weights differ house hold to household Price relatives are non-uniform

Define Monetary Inflation

Monetary Inflation is caused purely by a sustained increases in the money supply.

Inflation's affects on the functions of money: Medium of Exchange

Money loses value due to inflation; it thus becomes less valuable as a medium of payment in the exchange of goods and services. If enough value is lost people may begin to use barter.

How does one calculate the CPI? (Price relative, RPI, Rate of Inflation.)

Price relative= Current Price/ Base year RPI= Price Relative x Item Weighting/ Total weighting Rate of Inflation= Current RPI-Previous RPI/ Previous RPI x 100

How does inflation affect Consumption?

Purchasing power of money declines; house holds with a given level of income can't afford the same amount of goods and services they did before; therefore consumption decreases.

Inflation's affects on the functions of money: Store of Value

Real purchasing power of savings decline which compromises the function of money as a store of value.

Why exactly can the first type of inflation occur? Give 4 reasons.

Rising Wages; Trade unions can place pressure on employers for higher wages that does not correspond with an increase in productivity. This can spark a 'wage wage' in which one group of workers gain higer wage which then sparks off another group gaining higher wages; this causes a 'wage spiral' which results in a price increase of the good or service in question. Higher Import Prices; Fluctuations in prices of imported goods that a cannot be produced locally can cause a rise in the general price level. A depreciation of the exchange rate; A fall In the external price of a country's currency can result in higher prices of imported foods and thereby cause Inflation. A rise in indirect taxation; this would increase the firms cost and cause cost push inflation in the economy.

How does inflation affect savings?

The effects of inflation on savings varies; it can increase income if individuals choose to save more to restore the value of their savings that was eroed or it could decline as savers are discouraged from saving due to the low real rate of interest or the return on their savings.

Monetary inflation; equation of exchange

The equation: MV=PY best illustrates this. M= Money Stock V= velocity of circulation (number of times each unit of money is used to purchase a good. P= general level of prices Y= volume of finals G's and S's produced * this equation was modified by monetarists * it is assumed that V is constant and Y is fixed at full employment level of output * if the given economy is below Yf Y is not fixed.

What is CPI (Consumer Price Index)?

This is a price index which measures the weighted average price changes of a range/ basket of goods and services consumed by a household.

What is Hyperinflation?

This is a very rapid rise in the price level; and extremely high rate of inflation where the monthly inflation rate exceeds 50%

Explain the concept of weight in relation to the CPI?

Weight is assigned to each good in the basket to reflect its importance and how much income is devoted to the consumption of that particular good