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Inflation and Deflation (problems with measuring (relative importance?,…
Inflation and Deflation
Inflation
benefits
may help competitiveness
op increase
reduces real wage cost for firms
helpful as wages are sticky downwards
causes
Cost-push
COP increases
unions increase wage
SRAS shifts left
tax increases
decrease in FOP qty
DD-pull
firms raise op and prices
increase C, I, EG
when AD increases
govt increase G before elections
costs
redistributes wealth to those with assets
uncertainty - slow down EG
no efficiency of price mechanism
worsen BOP as M cheaper
Deflation
costs
low investment
AD decreases
delayed spending
benefits
lower GPL
X more competitive
causes
good deflation
productivity-driven
costs pushed lower
bad deflation
slump in Dd
excess supplies
shrinking money supply
USA in the 1930s
problems with measuring
relative importance?
time lag e.g. Amazon sells cheaper
based on typical fiticious consumer
change in tastes
CPI - a basket of goods