Chapter 32 Inflation. What do we call the verb to “blow up a balloon” to “inflate” So what is inflation in the economy? → Brainstorm a definition Inflation.

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Presentation transcript:

Chapter 32 Inflation

What do we call the verb to “blow up a balloon” to “inflate” So what is inflation in the economy? → Brainstorm a definition Inflation = a general and persistent rise in prices. It is shown as a %  Deflation = a decrease in the general price level of goods and services. May also be used to refer to a period where aggregate demand (total demand in an economy) is falling. This should not be confused with disinflation, a slow-down in the inflation rate (i.e. when inflation declines to lower levels). So when inflation slows from 3% p.a. to 2% p.a. this is disinflation not deflation, as prices still increased by 2%

How is inflation measured? (in the UK) Brainstorm Consumer Price Index (CPI) = Every month the government records the prices of about 600 G & S purchased by over 7,000 families. They then work out an average monthly price & convert it to an index number to allow comparisons to be made. CPI 2:20 Retail Price Index (RPI): includes house prices & council tax.

What is an index? Eg. of an index; Base (first) year is set to 100. If in Year 1 prices ↑ 25% the index figure = 125 If in Year 2 prices ↑ 10% the index figure = (125 X 10%) = Therefore we can see a general price ↑ of 37.5% over 2 years. Do Q. 1 P147

What causes inflation? 1.Demand – pull inflation What will happen to prices if there is an ↑ in agg. demand? Show on a demand/ supply graph. What may cause an ↑ in agg. demand? ▫ ↑ consumer spending due to tax cuts or ↓ in i/r’s. ▫ ↑ in govt. spending ▫ ↑ in demand for resources by firms ▫ ↑ I demand for exports Do Question 2 P. 149

What causes inflation (2)? 2. Cost – push inflation ↑ prices of factors of production means ↑ in costs for producers. Show the effects of this on a demand/ supply graph. What happens to prices? What may cause an ↑ in prices of factors of production? ↑ imported prices, e.g. oil ↑ wages because of strong trade unions ↑ tax e.g. VAT

What causes inflation (3)? 3. Money Supply = total amount of money in an economy An ↑ in MS → ↑ in agg. demand → inflation How can the govt. ↑ MS? ↑ notes/ coins (printing money) ↑ borrowing to fund spending causes of inflation 3 minshttp:// Exam practice Task: Investigate inflation. Same country as for GDP