Definitions Causes Effects Models AS90794: Describe inflation and its causes and effects using economic models AchievementMeritExcellence DescribeExplainFully Explain 2.1 Definitions Causes Effects Models

Inflation: Inflation A rise in the general level of prices. Disinflation A fall in the rate of inflation. Deflation A fall in the general level of prices. Hyperinflation The price level is rising at a very fast rate. The value of money is falling rapidly and people are losing confidence in the currency. Consumer Price Index An expenditure weighted price index measuring movements on the prices of a basket of household goods. The most commonly used measure of inflation. 2.1

Inflation: models 2.1 Quantity Theory of Money:the relationship between the money supply and the rate of inflation. An increase in the money supply is likely to lead, in the first instance, to an increase in the general level of prices. Limitations: This assumes that V and Q are constant. A more sophisticated approach allows V to change but in a predictable way that allows the RBNZ to still use monetary policy to influence nominal GDP. M V = P Q The Supply of Money (M1) The General Level of Prices Velocity of Circulation Real Output PQ is a measure of nominal GDP

Inflation: 2.1 AD/AS Modelto illustrate cost push and demand pull inflation Price Level RGDP AS AD PePe Market for G & S Qe AD’ P’ Price Level RGDP AS AD PePe Market for G & S Qe AS’ P’ Demand Pull Inflation: Any change that causes the economy’s demand for goods and services to increase. Cost Push Inflation: Any change that causes the economy’s supply of goods and services to decrease.