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Inflation (Inflation causes (Boom in consumer credit, Increase in world…

- - - - It may have cost 7% to take out a business loan (cost of borrowing), but the firms revenue may have significant increased if inflation is 10%. Thus, profits increase.
- - - - If the interest rate offers a 4% return on savings, but inflation is 6%, then the money stored in the bank is losing its purchasing power.
    - - If they lent at 2.5% and inflation is then 10%, their purchasing power is falling. Moreover, the lender could have used that money to invest elsewhere in the economy for greater returns, i.e. the opportunity cost of lending.
- - - - V = Velocity of circulation
      - P = Price level
      - M = Money Supply
      - Y = Output
- - - - Tax rate increases
      - Government spending increases
    - - Tightening monetary policy
        
        Reduced money supply
        
        Increased exchange rate
        
        Increased interest rate
  - - - Productivity
      - Competition and innovation
- - - - The use of a sample of different retail outlets, such as corner shops, supermarkets, and specialist stores taken from across the country.
      - The tracking of changes in prices from a given starting point, a base year.
      - The use of a sample of typical goods and services bought by ‘average’ households.
      - The allocation of different types of good with different weights to reflect their varying importance in the consumer’s shopping basket.
      - Changes are expressed in terms of the number 100 . An index of 110 means 10% inflation since the base year, and an index of 92 means 8% deflation since the base year.
    - - Now known as theEuropean Harmonised Index of Consumer Prices (HICP)
    - - Do goods stay the same over time?
        
        e.g. less weighting on petrol now as cars are more fuel efficient
      - How up-to-date is the basket?
      - Are the samples representative?
      - Why not measure capital goods prices?
        
        Only consumer goods are considered!
      - A 'two-speed' economy?
        
        Computers have fallen in price yet cars have increased