Download Inflation - Gore High School

A.S 2. 1 Inflation
Revision
4 Credits
Define the Following words
• Inflation _________________________________________
• Deflation ________________________________________
• Disinflation ______________________________________
• Consumer Price Index ______________________________
__________________________________________________
Purchasing Power ___________________________________
Define the Following words
• Inflation an increase in the general price level over a
period of time.
• Deflation A sustained decrease in the general price level
over a period of time.
• Disinflation Where the rate of inflation is decreasing
• Consumer Price Index Measures changes in the price level of a
“basket” of consumer goods and services purchased by
households
• Purchasing Power The amount of goods a set amount of money
will buy
Increase in individual markets VS general price rises
• Name three products that price rise’s of these
products could cause inflation
1. ____________________
2. ___________________
3. __________________
Explain why increase's in the price of bottles water is
unlikely to result in inflation
______________________________________________
______________________________________________
______________________________________________
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Increase in individual markets VS general price rises
• Name three products that price rise’s of these
products could cause inflation
1. Fuel
2. Electricity
3. Internet
Explain why increase's in the price of bottles water is
unlikely to result in inflation
Inflation is when there is a general increase in prices.
An increase in bottled water is only an increase in the
price of a single good which is not inflation. Since
bottled water is not used in the production of many
other goods and services it is unlikely to result in
inflation.
Quantity Theory of Money
• State the QTOM equation ________________
• What do each of the letters represent
Q _________________________
P_________________________
V ________________________
M________________________
What are the assumptions under the Crude theory?
__________________________________________________________________
Therefore an increase in M will cause what?
_____________________________________________________________
What are the assumptions under the sophisticated theory?
__________________________________________________________________
Therefore an increase in M will cause what?
________________________________________________________________
Quantity Theory of Money
• State the QTOM equation M×V =P×Q
• What do each of the letters represent
Q total output (GDP)
P the general price level
V the velocity/speed of circulation
M the money stock
What are the assumptions under the Crude theory?
Both V and Q are constant
Therefore an increase in P will cause what?
An increase in M (the money stock) will cause a proportional increase to P
(general price level).
What are the assumptions under the sophisticated theory?
Assumes only V is constant
Therefore an increase in M will cause what?
Could lead to either a rise in the general price level (P) OR an
increase in output (Q).
Business Cycle
• Label the stages of the business cycle model
below and the axis’s.
THE BUSINESS CYCLE
PEAK/
BOOM
Economic
activity
% Change
in RGDP
PEAK/
BOOM
TROUGH
TROUGH
Time
State the different characteristics of
the stages in the business cycle
• Peak / upswing –
_______Eco Activity
_______unemployment
_______investment
Consumer and business confidence is _______
_________inflationary pressure
• Downturn/Recession
_______Eco Activity
_______unemployment
_______investment
Consumer and business confidence is _______
– ___________or __________occurring
State the different characteristics of
the stages in the business cycle
• Peak / upswing –
–
–
–
–
–
High Economic Activity
Low unemployment
High Investment
Consumer and business confidence is high.
High Inflationary Pressure
• Downturn/Recession
–
–
–
–
–
–
Reduced economic activity
High Unemployment
Reduced investment
Unemployment increasing
Consumer and business confidence is low
Disinflation or deflation occurring
Business Cycle and QTOM
• State why in a boom an increase in the money
supply is likely to cause inflation
__________________________________________
__________________________________________
__________________________________________
__________________________________________
State why in a trough/downturn an increase in the
money supply may not cause inflation
____________________________________________
____________________________________________
____________________________________________
____________________________________________
Business Cycle and QTOM
• State why in a boom an increase in the money
supply is likely to cause inflation
In a boom all resources and technology are being fully utilised and
output is unlikely to be able to increase to help offset the increase in
money stock. So real output cannot increase when money stock is
increased. This means the price level (inflation) will increase.
• State why in a trough/downturn an increase in the
money supply may not cause inflation
In a trough there are resources available to be used to produce more
output. It is possible for an increase in the money stock to be absorbed
by increases in output, meaning inflation is less likely to occur.
AD/AS
• Draw the AD/AS model below
Name the factors that could cause
Demand pull inflation
1.
2.
3.
4.
5.
6.
_____________________________
_____________________________
_____________________________
_____________________________
_____________________________
_____________________________
Name the factors that could cause cost
push inflation
What two shifts could cause
inflation?
• ___________________________
• ___________________________
1.
2.
3.
4.
___________________________
__________________________
__________________________
__________________________
AD/AS
• Draw the AD/AS model below
Name the factors that could cause
Demand pull inflation
1.
2.
3.
4.
5.
6.
What two shifts could cause
inflation?
• Increase in AD
• Decrease in AS
Increased Incomes
Decreased income taxes
Increased optimism about the future
Decreased tendency to save
Consumers expect prices to rise in
the future
More money in the economy
Name the factors that could cause cost
push inflation
1. Increased costs of raw materials
2. Increased Wages
3. Failure to replace capital goods as
they age, reducing its productivity,
or increasing its maintenance costs
4. Falling Productivity of workers
Effects of Inflation on different groups
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•
Name the groups that are worse off with inflation
____________________
____________________
____________________
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Name the groups that are better off with inflation
____________________
____________________
____________________
____________________
Effects of Inflation on different groups
•
•
•
•
•
•
•
•
•
•
Name the groups that are worse off with inflation
Savers
Fixed income earners
Firms
Exporters
Name the groups that are better off with inflation
Borrowers
Those that incomes rise faster than inflation
Property/asset holders
Importers