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 ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________ ______________________________________________

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

Business Cycle Label the stages of the business cycle model below and the axis’s.

PEAK/ BOOM TROUGH Economic activity % Change in RGDP Time Upturn/recovery Downturn PEAK/ BOOM TROUGH Downturn Upturn/recovery THE BUSINESS CYCLE

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 What two shifts could cause inflation? ___________________________ Name the factors that could cause Demand pull inflation 1._____________________________ 2._____________________________ 3._____________________________ 4._____________________________ 5._____________________________ 6._____________________________ Name the factors that could cause cost push inflation 1.___________________________ 2.__________________________ 3.__________________________ 4.__________________________

AD/AS Draw the AD/AS model below What two shifts could cause inflation? Increase in AD Decrease in AS Name the factors that could cause Demand pull inflation 1.Increased Incomes 2.Decreased income taxes 3.Increased optimism about the future 4.Decreased tendency to save 5.Consumers expect prices to rise in the future 6.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 Name the groups that are worse off with inflation ____________________ 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