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11 - Inflation & Deflation - Coggle Diagram
11 - Inflation & Deflation
Definisions
Deflation
Reduction in the general level of prices in an economy over the span of a year
Disinflation
Reduction in the general rise of prices in a given economy over the span of a year
Inflation
The general rise in prices of goods and services in an economy over the span of a year
Types of Inflation
Demand Pull Inflation
Where demand for goods and services increase AD which in turn increases the price of goods and services
Cost Push Inflation
Where the raw materials used to make goods and services increase pushing the AS curve up which increase the cost of production which is most likely followed up by a increase in the price of those goods
Fishers Equation
Variable in the Fisher Equation
M
- Money Supply
The total amount of money circulating around an economy
Types of M
M0
This is the notes, coins or deposits from individuals in banks, this is a very narrow measure
Highly Liquid Money
M1, M2, M3, M4
These are used in the UK to refer to increasing less liquid money and more like non financial assets
The further from M0 the less liquid assets are like Bonds that mature in 5 years
All higher forms of M eg M4 include all of the forms of money before it, eg M4 includes M3, M2,M1,M0
V
- Velocity of Circulation
The number of times that money changes hands in an economy within a year
P
- Average Price Level (AKA Inflation
Q
- Quantity of Goods and services sold
The Fisher Equation
MV = PQ
What is sold must be brought therefore the 2 must be equal to one another.
This is the premise behind Monetarists view on the money supply and inflation
Rearranged to isolate price
P = MV / Q
However, Monetarists argue that V and Q change so little they are basically fixed thus creating...
M = P
More money chasing the same number of goods thus, inflation
Effects on Inflation
Expectations
Inflation expectation describe what people and businesses expect to happen to inflation in the future (usually over a year)
If people are expecting higher prices on goods and services they would also want higher wages to accommodate which can cause a wage-price spiral
Δ in Commodity Prices
A rise in commodity good prices like Oil or copper will cause Cost Push Inflation
A fall in commodity good prices will cause a decrease in cost push inflation and, depending on the decrease, could cause deflation
Δ in Other Economies
Δ in Imports and Exports
Consequences of Inflation
Individuals
Falling Real Incomes
Negative Real Interest Rates
Cost of Borrowing
Risk of Wage Inflation
Performances of the Economy
Less Equal Income Distribution
Risk of Wage inflation
Change in Business international Competitiveness (Decreases)
Business Uncertainty
Consequences of Deflation
Individuals
Delayed Spending
Lower Wages
Performance of the Economy
Reduced Consumption
Increased Unemployment
Reduced Business Investment
Growth of the Debt Burden
Strong Pound
Cheap Imports
Expensive Exports
