Inflation - Level 2 Economics

Inflation is a general increase in the price level over a period of time

Deflation is a general decrease in price levels

A fall in the inflation rate

The good or service is an individual market. CPI measures average prices changes over a number of markets. So while prices of some goods or services are falling there can still be a rise in most goods and services so CPI will rise

Lower interest rates result in less savings and increased comsumption spending by households and increased investment by firms, this will cause AD to increase causing inflation

A fall in the New Zealand dollar results in exporters swapping foreign earnings for more New Zealand Dollars. This increase in earings enable more spending so causes AD to increase therefore inflation.

A fall in the New Zealand dollar results in an increase in the cost of imported raw materials. An increase costs faced by firms will cause AS to decrease and cause inflation.

A rise in the price of a vegetable only affects one market, whereas a rise in the price of oil affects many different markets through higher transportation costs, so more likely to lead to a rise in the general price level therefore inflation.

A rise in business confidence will lead to increased investment, causing AD to rise, and inflation.

As money supply increases the rate of inflation also increases.

The velocity of circulation might increase, or output in the economy might fall.

• -Income becomes less evenly distributed
• -As income increases you move into a higher tax bracket
• -Savings have less spending power
• -Decrease in spending power for those on benifits

• -Risings costs (wages, raw materials, interest rates)
• -Difficult to replace old equipment
• -Planning difficulties
• -Exports less competitive
• -Less investment.

• -Exports are mroe expensive to overseas buyers so exprt reciepts might fall
• -Exports are less competitive
• -Imports are cheapers so import payements will rise
• -Local producers products become more expensive compared with imports so demand for them goes down.

• -Increase in nominal wages
• -Inrease in indirect tax
• -Decrease in workers productivity
• -Depreciation of the New Zealand Dollar

• -Increase in inflationary expectations
• -Increase in consumption spending
• -Increase in business investment
• -Reduced direct tax
• -Increase in govt spending
• -Increase in net exports

A situation where the process of rising prices is initiated and sustained by increasing costs of productions which push up he general prices level.

A situation where demand exceeds supply at current prices, so prices are pulled up by aggregate demand. OR prices rising due to an aggregate demand.

• M= Money Supply
• V=Velocity of circulation
• P=Price Level
• Q=Real output/the quantity produced

• (i) Boom Phase
• (ii)At the top end of the business cycle when the economy is near full capacity resources are most full employed and real output cannot expand further, Q may be relatively constant.

Savers may lose out because inflation decreases the real value (purchasing power) of savings

Borrowers may benifit because if inflation is high the real value of the borrowed ammount decreases.

Total production by all firms in an economy

An increase in teh cost of imported materials will increase firms's costs of production causing AS to shift inward (left)

• Boom/Peak
• Recession/Downsizing/Contraction
• Trough/Depression
• Expansion/Upswing/Recovery
• Boom/Peak