Swot Notes Inflation Essay

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SWOT notes for inflation.
1) Identify a general price rise and an individual price rise?
General Price rise in general price level.
Individual price rise is a price rise for a specific product eg butter

2) Identify and define inflation, disinflation and deflation?
Inflation-Inflation can be defined as a general increase in the price level of a nation over a period of time. An increase in the price of a particular good or service does not mean that inflation has occurred. Inflation means the average level of prices is rising and a dollar will buy less now compared with a previous time period, i.e., the purchasing power of the dollar is falling.
Disinflation is the term that describes the process of reducing or eliminating inflation. Disinflation occurs when the rate of inflation is falling, i.e., the average price level is increasing but by a smaller percentage than before.
Deflation is the opposite of inflation and occurs when the general price level is falling. In times of deflation individuals may be put off spending because they expect prices to fall, this may cause economic activity to slow down.

Explain the Quantity Theory of Money?

(M)Money supplied*(V)velocity of circulation= (P)price of each transaction/price level*(Q)real output/volume of transactions/number of goods purchased.

The theory shows that if the money supplied increases, then inflation will increase assuming that the velocity of money and the real output/volume of transactions/number of goods purchased.

3) Explain the crude theory and sophisticated theory of money?
The crude version assumes that Q and V remain the same but in truth they can change. The sophisticated version allows Q and V to change eg if V and Q change then increases in M may cause an increase in Q while P remains unchanged, so increases in M do not always increase P.

AD/AS model

4) Describe AD and AS?
Aggregate demand is the total demand for an economy and equals national income. AD=consumer spending+investment spending+Government surplus+(export receipts-import payments) .

Aggregate supply is the total output of an economy.

5) Things that can shift AD and AS?
See pages 62 and 68 attached

6) Define cost push and demand pull inflation and its causes?
Cost push inflation describes a situation where the process of rising prices is initiated and sustained by increasing costs which push up the general price level. Cost-push inflation can develop whenever prices are forced upwards by increases in the price of inputs used in the production process. Examples of inputs are cost of wages and salaries, raw materials, power, rent, rates, government charges (e.g., indirect taxes or fees) and many more.
Demand-pull inflation is a situation where demand exceeds supply at current prices, so prices are pulled up by aggregate demand. This inflation results from an increase in any of the components of expenditure on GDP that would increase aggregate demand. Some of the reasons for increased aggregate demand are:
1. rising household incomes due to direct tax cuts and increased transfer payments;
2. increased investment by business due to lower interest rates or more confidence in the future prospects of the economy
3. an export boom due to depreciation of the exchange rate. A falling New Zealand dollar results in exporters swapping foreign earnings for more New Zealand dollars. The increased earnings enable more spending so cause AD to increase and therefore inflation.
4. an expansionary fiscal policy, i.e., a government budget deficit.
5. If individuals expect that prices will rise they will want to buy goods and services now, rather than wait until later, when they are more expensive and less affordable. By acting in this way inflation will rise faster than otherwise would be the case. Thisinflationary expectation will effectively increase aggregate demand and bring about demand-pull inflation.

Money supply and the inflation rate.

7) Explain the link between money supply and the rate
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