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Chapter 32 Inflation

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 % 

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Chapter 32 Inflation

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  1. Chapter 32 Inflation

  2. 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%

  3. 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.

  4. 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

  5. What causes inflation? • 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

  6. 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

  7. 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

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