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Inflation (Effects of Inflation (Income Redistribution, Falling Real…
Inflation
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Inflation
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In general, a low level of inflation is desirable as it creates some flexibility in an economy.
Famous British economist John Maynard Keynes believed that some inflation was necessary to prevent the "Paradox of Thrift." If consumer prices are allowed to fall consistently because the country is becoming too productive, consumers learn to hold off their purchases to wait for a better deal.
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Money Supply
Another major cause of inflation is the growth in the level of the money suppy circulating in an economy.
If the Money Supply increases faster than real output, then inflation occurs.
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Quantitive Easing
To bring the UK and European markets out of recession, central banks including the Federal Reserve and the Bank of England increased the money supply in the economy by buying back debt (government bonds) from the commercial banks.
Measuring Inflation
Consumer Price Index
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The base year is usually 100 indices, although sometimes it is 1000
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Causes of Inflation
Demand-Pull Inflation
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Demand in an economy is rising fsater than supply creating shortages in goods and services. price rationing is the result
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Cost-Push Inflation
When firm's costs increase, e.g. wages, rents, imports, they will try to pass on theses additional costs onto the consumers.
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Inflationary Spiral
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Example: trade unions fight for higher wages for employees. This leads to further inflation. Wage rates increase again and everything starts again.
The inflationary spiral is a self-sustaining upward trend in general price levels fuelled by the reinforcing feedback of a vicious cycle.
Deflation
Deflation is a contraction in the supply of circulated money within an economy, and therefore the opposite of inflation.
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Stagflation
Stagflation is the combination of high unenmploymnt and economic stagnation (recession) with inflation.
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