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Macroeconomic Indicators Inflation and Deflation Key terms • • • • • • • • • • • • Inflation Deflation CPI Family Expenditure Survey Cost-push inflation Demand-pull inflation Wage-price spiral Anticipated inflation Unanticipated inflation Shoe-leather costs Benign deflation Malevolent deflation • Retail Price Index (RPI) • Consumer Price Index (CPI) – Weighted price index • Relative importance as proportion of spending • Price index X weighting = weighted price index Limitations of CPI • Different population groups experience different inflation. Not everyone is ‘average’. • House prices not included but mortgage repayments influence spending. • Over-estimate inflation. Prices may not reflect quality/innovations Cost Push revisited • Causes – – – – Import costs Labour costs Indirect tax rises Wage-price spirals Demand Pull revisited Quantity Theory of Money (Monetarists) • That an increase in the money supply will lead to an increase in the price level • • • • • • – Fisher equation – Equation of exchange M x V = P x T (or MV = PY) M = Money supply V = the velocity of circulation P = general price level T = Transactions (output) Y = RNO (real GDP) • Velocity of circulation – The number of times a unit of currency changes hands in a year (to buy goods and services) – This is assumed to be constant – T and Y tend to increase slowly over time, therefore are also assumed to be constant – M x V = P x T if V and T (Y) are constant, a change in M will cause a change in P – inflation! Consequences of Inflation • • • • • • • • • Competitiveness Investment Distribution of income Industrial relations Fiscal drag Hyperinflation Money illusion Menu costs Shoe-leather costs Inflation and Index numbers Add the definitions for extra marks Include a diagram for extra marks Note the micro overlap