Chapter 32 Inflation

• What do we call the verb to “blow up a balloon”

• to “inflate”

• So what is inflation in the economy? →Brainstorm a definition

• Inflation = a general and persistent rise in prices. It is shown

as a %

• Deflation = a decrease in the general price level of goods and

services. May also be used to refer to a period where aggregate

demand (total demand in an economy) is falling.

• This should not be confused with disinflation, a slow-down in

the inflation rate (i.e. when inflation declines to lower levels).

• So when inflation slows from 3% p .a. to 2% p.a. this is

disinflation not deflation, as prices still increased by 2%

How is inflation measured? (in the UK)

•Brainstorm•Consumer Price Index (CPI) = •Every month the government records the

prices of about 600 G & S purchased by over 7,000 families. They then work out an average monthly price & convert it to an index number to allow comparisons to be made.

http://www.youtube.com/watch?v=Si37yjZM-SA

CPI 2:20•Retail Price Index (RPI): includes

house prices & council tax.

What is an index?

•Eg. of an index;•Base (first) year is set to 100.•If in Year 1 prices ↑ 25% the index figure

= 125•If in Year 2 prices ↑ 10% the index figure

= 125 + (125 X 10%) = 137.5•Therefore we can see a general price ↑ of

37.5% over 2 years.•Do Q. 1 P147

What causes inflation?1. Demand – pull inflation•What will happen to prices if there is an ↑

in agg. demand? Show on a demand/ supply graph.

•What may cause an↑ in agg. demand?▫↑consumer spending due to tax cuts or

↓ in i/r’s.▫↑ in govt. spending▫↑ in demand for resources by firms▫↑ I demand for exports

•Do Question 2 P. 149

What causes inflation (2)?

2. Cost – push inflation

• ↑ prices of factors of production means ↑in costs

for producers. Show the effects of this on a

demand/ supply graph. What happens to prices?

• What may cause an↑ in prices of factors of

production?

• ↑imported prices, e.g. oil

• ↑ wages because of strong trade unions

• ↑ tax e.g. VAT

What causes inflation (3)?

3. Money Supply

= total amount of money in an economy

• An ↑ in MS → ↑ in agg. demand → inflation

• How can the govt. ↑ MS?

• ↑ notes/ coins (printing money)

• ↑ borrowing to fund spending

• http://www.youtube.com/watch?v=bibMshyRabE causes

of inflation 3 mins

• Exam practice

• Task: Investigate inflation. Same country as for GDP