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Transcript of INFLATION
What is inflation?
increase in the general price level of goods and services in an economy over a
period of time
Causes of inflation
Cost Push Inflation
Strains of inflation
Rise in GPI of <5% per annum
Households, C & M
Foreign buyers, X
Rise in GPI of 10% to a few hundred %
May lead to introduction of new currency
High and unusual accelerating rates of inflation
= Actual income
= inflation adjusted income
New RI - Old RI
"Too much money chasing too few goods"
AD is growing at an unsustainable rate
Increased pressure on scarce resources
positive output gap
sustained or continual increase in aggregate demand
Producers are able to raise their prices and achieve bigger profit margins because demand is running ahead of supply
More severe when SRAS is inelastic and there is full employment of resources
Depreciation of local exchange rate
Increases price of imports
Reduces price of country exports
Since AD= C+I+G+ (X-M)
Higher demand from a fiscal stimulus
Increasing government consumption or transfers or lowering taxes
Money given to the citizens by the government
When taxes ,
Household disposable income
Consumer spending & confidence in local economy
Government spending . Therefore, AD
Monetary Stimulus to the economy
When interest rates ,
Demand for loans
Fast growth in other countries
Exports to foreigners
Firms respond to rising costs, by increasing prices to protect their profit margins.
Occurs when wages
Firms will need to price of goods
SRAS curve to shift up
Hence, GPL will
If GPL remains, firms will have to wages again
Effects of inflation
Shoe leather cost
Cost of time and effort spent trying to counter-act effects of inflation.
Additional time & convenience sacrificed to keep less money on hand.
Effects of deflation
Higher rate of Unemployment
Decrease in Investments
Steady State Costs
Costs that arise once the transition takes place
Costs to changing prices
Inflation: Revised up
Deflation: Revised down
Loss of government revenue:
Tax provisions are based on real incomes
Tax rates (even if no change to spending power)
Therefore, government revenue
Costs to monetary policy
Deflation = Weak economy
aka Runaway/galloping inflation
Imagine you are Japanese citizen and you are considering whether to set up your construction business in Singapore or Japan? One of the factors that influences your decision would be the inflation rates in both countries.
In the past - Japanese government tried to combat its deflation by introducing currency intervention and monetary policy, such as by lowering nominal interest rates and increasing government spending. This caused an excess demand and caused the AD curve to shift to the right, causing an increase in the General Price Level (GPL)
Currently - government has decided to increase its spending so as to lower the GPL. This in turn, results in a fast shifting of the AD to the left
Singapore experiences cost-push inflation.
A new policy where they want to restrict the number of foreign workers
Cause concerns that labour costs would rise
Have become a contentious issue in the wealthy city-state
Influx of foreign workers has pressured the public transport system
Also pushes up the cost of housing in recent years
Different components have also increase in price; eg food
The key idea they have is that companies need to put better technologies to use and pay low-paid workers better
These rising labour costs and the rise in the different components will thus result in an inner shift of the SRAS, resulting in a contraction of national output and increase in General Price Level.
What types of impacts have resulted from the inflation/deflation in each country?
Which country is facing a bigger issue with inflation/deflation?
Other higher order questions...
Occurs when prices of import goods
Cost of production
Will cause SRAS curve to shift up
Hence, GPL will
Occurs when an unexpected event that changes the supply of a product or commodity
A sudden change in its price
in input prices
in cost of production
SRAS curve shifts
Hence, GPL will
Slower inflation. The fall in the rate of inflation.
Opposite of inflation.
There are sustained or continual decreases in SRAS. Less products are supplied with same amount of money.
1. Stock prices ↓
2. Real return on investments ↓
3. Discouragement in investment
4. Bond prices ↓
=> OUTPUT decreases
The term comes from the fact that more walking is required to go to the bank and get cash and spend it, thus wearing out shoes more quickly
the costs of changing prices due to inflation
Firms, such as restaurants have to change their menus to match the change in inflation which costs time and increases labour costs.
We choose Japan