inflation

money-supply

Money Supply, M0, M3, M4 and Inflation

Definition: The money supply measures the total amount of money in the economy at a particular time. It includes actual notes and coins and also any deposits which can be quickly converted into cash. There are different measures of the money supply. Narrow Money e.g. M0 = This is the level of notes and coins in circulation + banks operational balances at the Bank of England. Broad money e.g. M4 money supply is defined as a measure of notes and coins in circulation (M0) + bank accounts. It is…

Causes of deflation

Causes of deflation

Readers Question: What is the cause of deflation? Deflation involves a fall in the price level –  a negative rate of inflation. From a very basic standpoint, there are two main potential causes of deflation: A fall in aggregate demand (AD) A shift to the right of aggregate supply (AS) – i.e. lower costs of production through improved technology. Deflation usually occurs during a deep recession, when there is a sustained fall in demand and output. This deflation may occur in the…

econ-growth-inflation-dec

Inflation and Recession

In a recession, you would usually expect a fall in the inflation rate due to lower demand. Though in theory, we can have a period of stagflation – rising inflation and falling output (e.g. after a rise in the price of oil) A recession means two consecutive quarters of negative economic growth. With falling economic output and rising spare capacity, prices are likely to fall (or at least go up at a slower rate.) This is because: Firms have unsold goods. Therefore, to improve their cash flow they try discounting goods to get rid…

Demand-pull inflation

Demand-pull inflation

Demand-pull inflation is a period of inflation which arises from rapid growth in aggregate demand. If aggregate demand (AD) rises faster than productive capacity (LRAS), then firms will respond by putting up prices, creating inflation. Inflation – a sustained increase in the price level. Demand-pull inflation – inflation caused by AD increasing faster than AS. Demand-pull inflation means: Excess demand and ‘too much money chasing too few goods.’ The economy is at full employment/full capacity. The economy will be growing at a rate…

Inflation: advantages and disadvantages

Inflation: advantages and disadvantages

Readers Question: what are the advantages and disadvantages of inflation? Inflation occurs when there is a sustained increase in the general price level. Traditionally high inflation rates are considered to be damaging to an economy. High inflation creates uncertainty and can wipe away the value of savings. However, most Central Banks target an inflation rate of 2%, suggesting that low inflation can have various advantages to the economy. Some economists even argue we should target a higher inflation rate during periods of economic stagnation.

Pros and Cons of Inflation

Pros and Cons of Inflation

Readers Question: What are the advantages and disadvantages of inflation? The Government have an inflation target of CPI 2%. This suggests they would rather have moderate inflation than no inflation at all. Advantages of Inflation Deflation is potentially very damaging to the economy and can lead to lower consumer spending and lower growth. For example, when prices are falling, consumers are encouraged to delay purchasing in the hope prices will be cheaper in the future. A moderate inflation rate reduces the real…

Policies to reduce inflation

Policies to reduce inflation

Inflation is a period of rising prices. Most Central Banks target low inflation. If inflation rises above this inflation target, there are several economic policies, such as monetary policy to reduce the inflation rate. Summary of policies to reduce inflation Monetary policy – Higher interest rates. This increases the cost of borrowing and discourages spending. This leads to lower economic growth and lower inflation. Tight fiscal policy – Higher income tax and/or lower government spending, will reduce aggregate demand, leading…

costs-of-inflation

Importance of Inflation for Industry

Inflation – is defined as a persistent increase in the general price level. The inflation rate is a key statistic and has important consequences for industry. In particular, high rates of inflation often discourage investment and lead to lower long-term growth for the following reasons: How inflation affects industry Uncertainty. High and volatile inflation creates uncertainty and confusion about future prices and costs; this tends to reduce investment and lead to lower rates of growth in the economy, and therefore less demand for…