Price stability flashcards

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Define inflation.

A sustained increase in the general price level — not a one-off rise in a single good.

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Inflation vs deflation vs disinflation?

Inflation: P rising. Deflation: P falling. Disinflation: inflation rate falling (prices still rising, but more slowly).

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CPI inflation rate formula?

Inflation rate = ((CPI this year − CPI last year) ÷ CPI last year) × 100%

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Demand-pull inflation?

AD increases faster than LRAS capacity — AD shifts right; 'too much money chasing too few goods'; P and Y both rise.

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Cost-push inflation?

SRAS shifts left due to higher input costs (wages, oil, imports) — P rises but Y falls (stagflation).

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Main costs of high inflation?

Uncertainty, menu costs, shoe-leather costs, redistribution (debtors gain, savers lose), and loss of international competitiveness.

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What is the Consumer Prices Index (CPI)?

A measure of the general price level used to calculate inflation. It tracks the price changes of a weighted 'basket' of goods and services representative of typical household spending.

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Define demand-pull inflation.

Inflation caused by persistent excess aggregate demand in the economy, where AD is rising faster than aggregate supply. It is represented by a rightward shift of the AD curve.

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Define cost-push inflation.

Inflation caused by a rise in the costs of production, leading to a decrease in short-run aggregate supply. It is represented by a leftward shift of the SRAS curve.

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What is stagflation?

An economic situation characterised by a combination of stagnant economic growth (falling real GDP), high unemployment, and high inflation. It is a primary consequence of cost-push inflation.

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Distinguish between deflation and disinflation.

Deflation is a persistent fall in the general price level (e.g., inflation rate of -1%). Disinflation is a fall in the rate of inflation (e.g., inflation falling from 5% to 3%). Prices are still rising during disinflation, just more slowly.