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Chp 7: Inflation - Coggle Diagram
Chp 7: Inflation
Effects of Inflation
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Allocative Inefficiency
Resources are diverted towards speculative goods like property and gold (whose price are rising faster than others) but this is only short term demand as the long term demand is still towards essential goods like food
Lower welfare
For fixed income or low income workers (often declining industries), nominal income does not increase as much as general price level
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Depends on whether inflation is anticipated, the extent and also inflation relative to other countries
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Effects of Deflation
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Redistributive effects
Consumers expect general price level to fall and not spend, firms lower prices and cut down on production, investment falls due to negative outlook
Fall in AD, Fall in employment (Downward spiral)
Could mean efficient adjustment in price levels where resources are allocated to more profitable sectors
How to manage inflation
Decrease AD, increase SRAS, increase LRAS