Lublation
Inflation to
sustained increase in cost of living or the general price level leading to a fall in
purchasing power ofmoney
( macro
objective of
price stability cannota chieve
widely used measure price index:
⑧Retail Price Index (RP))
& (CPI) oft ime
Consumer
price index -
average change in price paid by consumer over a period
0 rate ofinflation -> measure by annual
percentage change in consumer prices
MEASURE
0
Using trading Economic, British government inflation targetof
21
using consumer price index (CPI)
PRICEINDEX has set
O formula:
in
prices CPI current year-CP1 previous year
percentage change
=
1001
x
CPI previous year
↳ the, price rising - inflation
-ve, price droping -> deflation
CONVERTING o Real data nominal data after
adjusting inflation (take inflation into consideration)
NOMINAL DATA formula:
100
TO REAL DATA O deflation:
price currentyear
index of
& Real data:N ominal data x
deflator
CALCULATE 0 CP1 is weighted price index-- changes in weights reflect shifts in the spending patterns of
household
WEIGHTED PRICE -P
price index= sumct (price weight
INDEX (CD1) sum of
weight
Example:
price index previous year:102.1
price index current:1 12.5
hence,
rate ofinflation:
112.5-104. x100%
104. I
=8.07%
not fully representative changing quality ofgoods and services
'non-typical household
-o
-> inaccurate for
improvement in
quality/performance ofproduct
n
index devoted to
a
14% of
CPI
Eg. motoring cost >4
->
price
-
inapplicable for non-car owner
LIMITATION OFCPI
↓
- New products
CPI slow in products & services
spending patterns *
response to new
->
single people have different spending ↳CPI basket change each
year only
but a few item
pattern from nomenods fall out I
join
Made By StudyWithA
, CAUSE OFI NFLATION
I
CAUSE OF I I
INFLATION AD side [4] As side [A]
-x AD -> inflation
very important C + I G NX
cost-push
=
I
+
+
price
part very
- > Demand pull inflation
I
---
SRASc
price
common question ⑭
SRAS,
SRAS *
*
for
m explanation
I am
SHOW
=-
ian.* "
inflation
understanding
-
- ↑
need include evidence
only, no
At
inflation
A National
output
As
* can be drawn in straight line
when investment4, AD4, shift right
Inflation can be caused
by internal and external cost:
-> domestic economy ->
e.g. decisions ofutility businedes providing electricity or
gas or water on their tariffs for year ahead
*
4 VAT (value-added tax) would I domestic inflation in short-term-p4 firm's
production cost
sustained 4 in price crude
of oil
- external sources - or other imported commodities
a fluctuations in exchangerate -
in pound
value of against other currencies - 4 import price feed through directly or indirectly into
CPI
DEMAND PULL INFLATION
o
demand pull inflation -> caused by persistent increase in AD
price
⑭ ·typically associated with a
booming economy
printin
o
an increase in demand from AD, to AD will increase the price from p, to PC
o if price increase generally accod economy, as a resultincreased aggregate demand,
demand pull occur
factor affect AD:
interestr ates
job security
-
-incomes governmentpolicies
taxes
-
depreciation higher demand
o from
exchange rate * -> a fiscal stimulus
MAIN CAUSE OF DEMAND
PULL INRLATION
S
To
fast growth in monetary stimully to economy
other countries
Depreciation of exchange rate: A
higher demand from fiseal stimulus
4 price ofimports foreign price of country's export fiscal stimulus:expansionary ficeal
-> and a is
policy
-> if consumers buy few imports mile (e.g. low direct or indirect taxes or high
export grow
-> ADP, may be a multiplier effect on level ofdemand government spending)
disposable income
direct tax b, ADY
and output -is 4 ->
AD,
->
shift to AD2 which 4 price from P, to P2 (from AD C = +1 + G NX)
+
->
result of4AD, demand pull extra AD, shift
price increase generally as a ->4
government spending, I borrowing ->
↑
inflation occurs
from AD, to AD2, 4 price from 01 to P2
Made By StudyWithA
Inflation to
sustained increase in cost of living or the general price level leading to a fall in
purchasing power ofmoney
( macro
objective of
price stability cannota chieve
widely used measure price index:
⑧Retail Price Index (RP))
& (CPI) oft ime
Consumer
price index -
average change in price paid by consumer over a period
0 rate ofinflation -> measure by annual
percentage change in consumer prices
MEASURE
0
Using trading Economic, British government inflation targetof
21
using consumer price index (CPI)
PRICEINDEX has set
O formula:
in
prices CPI current year-CP1 previous year
percentage change
=
1001
x
CPI previous year
↳ the, price rising - inflation
-ve, price droping -> deflation
CONVERTING o Real data nominal data after
adjusting inflation (take inflation into consideration)
NOMINAL DATA formula:
100
TO REAL DATA O deflation:
price currentyear
index of
& Real data:N ominal data x
deflator
CALCULATE 0 CP1 is weighted price index-- changes in weights reflect shifts in the spending patterns of
household
WEIGHTED PRICE -P
price index= sumct (price weight
INDEX (CD1) sum of
weight
Example:
price index previous year:102.1
price index current:1 12.5
hence,
rate ofinflation:
112.5-104. x100%
104. I
=8.07%
not fully representative changing quality ofgoods and services
'non-typical household
-o
-> inaccurate for
improvement in
quality/performance ofproduct
n
index devoted to
a
14% of
CPI
Eg. motoring cost >4
->
price
-
inapplicable for non-car owner
LIMITATION OFCPI
↓
- New products
CPI slow in products & services
spending patterns *
response to new
->
single people have different spending ↳CPI basket change each
year only
but a few item
pattern from nomenods fall out I
join
Made By StudyWithA
, CAUSE OFI NFLATION
I
CAUSE OF I I
INFLATION AD side [4] As side [A]
-x AD -> inflation
very important C + I G NX
cost-push
=
I
+
+
price
part very
- > Demand pull inflation
I
---
SRASc
price
common question ⑭
SRAS,
SRAS *
*
for
m explanation
I am
SHOW
=-
ian.* "
inflation
understanding
-
- ↑
need include evidence
only, no
At
inflation
A National
output
As
* can be drawn in straight line
when investment4, AD4, shift right
Inflation can be caused
by internal and external cost:
-> domestic economy ->
e.g. decisions ofutility businedes providing electricity or
gas or water on their tariffs for year ahead
*
4 VAT (value-added tax) would I domestic inflation in short-term-p4 firm's
production cost
sustained 4 in price crude
of oil
- external sources - or other imported commodities
a fluctuations in exchangerate -
in pound
value of against other currencies - 4 import price feed through directly or indirectly into
CPI
DEMAND PULL INFLATION
o
demand pull inflation -> caused by persistent increase in AD
price
⑭ ·typically associated with a
booming economy
printin
o
an increase in demand from AD, to AD will increase the price from p, to PC
o if price increase generally accod economy, as a resultincreased aggregate demand,
demand pull occur
factor affect AD:
interestr ates
job security
-
-incomes governmentpolicies
taxes
-
depreciation higher demand
o from
exchange rate * -> a fiscal stimulus
MAIN CAUSE OF DEMAND
PULL INRLATION
S
To
fast growth in monetary stimully to economy
other countries
Depreciation of exchange rate: A
higher demand from fiseal stimulus
4 price ofimports foreign price of country's export fiscal stimulus:expansionary ficeal
-> and a is
policy
-> if consumers buy few imports mile (e.g. low direct or indirect taxes or high
export grow
-> ADP, may be a multiplier effect on level ofdemand government spending)
disposable income
direct tax b, ADY
and output -is 4 ->
AD,
->
shift to AD2 which 4 price from P, to P2 (from AD C = +1 + G NX)
+
->
result of4AD, demand pull extra AD, shift
price increase generally as a ->4
government spending, I borrowing ->
↑
inflation occurs
from AD, to AD2, 4 price from 01 to P2
Made By StudyWithA
