Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

Macroeconomics: Inflation
Inflation: the rate at which prices for goods and services are rising
...


Note: If money supplies are very big then prices rise and the value of money decreases
...
This can
develop into a dramatic decrease in falling prices, incomes and employment leading to an economic
recession
...


Measuring Inflation with CPI:
Consumer Price Index (CPI) is used to measure the difference in inflation compared to different
countries
...

The content of the ‘basket’ is changed every 12 months to reflect changes in shopping habits
...


Calculating CPI:
1
...

Eg: if £500 out of a total expenditure of £2,000 is spent on food, then food would receive a
weighting of ¼
1
...
(
Percentage change in Price is second-year price - first-year price/first-year price x 100)
...
Eg: the price of oil/ petrol increases and total inflation
increases, only people using cars and other vehicles will be affected
...

People switch between expensive to cheaper alternatives, but the CPI doesn't consider this
...
Eg: A Tv in 2015
costs lower than in 2018 because the 2018 model has a better quality screen and more
features
...


The Retail Prices Index:
It's an alternative measure for inflation but it is also used with CPI
...
It gives weighting to what
people consider is important like housing, food and energy
...
They give slightly higher figures than the CPI but
show a more accurate version
...
Occurs when the level of unemployment is low and
thus people have more money to spend meaning an increase in purchasing power which also means
an increase in demand
...
This forces the firms to increase the prices again to maintain
profitability
...
If
global prices rise for example oil and metal, it will be expensive for a country to import it which leads
to increase in product prices to maintain profitability
...
They can't not increase wages as this might lead to lower
productivity efficiency
...


Growth of Money Supply- In this theory, inflation is caused by an increase in supply of money in an
economy
...
Additional money
means people can spend more which in turn leads to again an excess in demand leading to price
increases
...

Also, firms in turn to maintain profitability will continuously try to increase their prices leading to more
price/wage increase spiral
...
People with bargaining power can get an increase in wages
...


Savers and Borrowers- ignoring interest rates, saving in banks lose value which affects savers, also
debt loses its original value causing it to decrease leading to a gain in borrowers perspective
...
The opposite
happens to borrowers
...
The effect depends on how well a business can keep
wages down by negotiating and raising it later
...
For goods which are inelastic in demand like
food, the firms are able to raise prices due to demand not changing significantly as it is a necessity
...
Also, it's affected by foreign markets as imports become more expensive as the
currency of the country loses its value
...
The
government also takes debts to finance public projects, which means if interest rates are lower than
inflation rates then debt will be reduced and vice versa
...




---