Inflation Theories and Effects Quiz
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Inflation Theories and Effects Quiz

Test your knowledge of inflation and its effects with this quiz. Explore different theories about the causes of inflation, the effects of inflation on the economy, and how inflation can be measured and predicted.

Created by
@CrispMossAgate

Questions and Answers

¿Cuál es el objetivo principal de la Reserva Federal?

Establecer una tasa de inflación estable

¿Qué teoría explica la inflación como un fenómeno monetario?

Teoría clásica

¿Cuál es la principal medida de la inflación?

Índice de precios

¿Qué teoría relaciona la inflación con la dependencia?

<p>Teoría desarrollista</p> Signup and view all the answers

¿Qué teoría sugiere que la inflación está determinada por la cantidad de dinero en circulación?

<p>Teoría clásica</p> Signup and view all the answers

Study Notes

  • In economics, inflation is a general and sustained increase in prices of goods and services in a market. When the general level of prices rises, with each unit of currency bought, fewer goods and services are acquired. This is because inflation reflects a decrease in the real value of the domestic currency: a loss of real value of the internal market exchange and unit of measure of an economy. A common measure of inflation is the price index, which corresponds to the percentage of the year's general price inflation in time (the most common is the price index for consumers).

  • The negative effects of inflation include a decrease in the real value of the currency over time, discouragement of savings and investment due to uncertainty about future value of money, and scarcity of goods. The positive effects of inflation include the possibility of central banks adjusting nominal interest rates in order to mitigate a recession and foster investment in non-monetary capital projects.

  • Today, most economic schools agree that very high and hyperinflation are caused by excessive growth of money supply. There is much disagreement about the factors that determine low or moderate inflation rates. Inflationary expectations are more varied. The inflationary trend may be attributable to fluctuations in demand for goods and services, changes in available costs and supplies (such as raw materials, energy, wages, etc.), or growth of the money supply.

  • Most of the time, inflation is caused by the relationship between supply and demand for money. This can be caused by either an excessive increase in the supply of money or a sudden decrease in demand for money, which is called a liquidity trap. Today, the task of keeping inflation low and stable is usually assigned to central banks, usually banks' central banks. Generally, these central banks are the Federal Reserve, which controls the size of the money supply through the setting of interest rates, through transactions in the market for foreign currencies, and by creating bank reserves.

  • Inflation is a general increase in prices.

  • There are many ways to measure inflation, but the most common is the consumer price index (CPI).

  • The CPI tracks the prices of a variety of goods and services bought by typical consumers.

  • The inflation rate is the percentage increase in the CPI over a period of time.

  • The Federal Reserve (the US central bank) pays close attention to the inflation rate subyacente, which measures the inflation rate for a subset of prices that excludes prices for food and energy.

  • The inflation rate result from the CPI is 4.28%.

  • The main goal of the Federal Reserve is to keep inflation at a low rate.

  • There are two theories about the cause of inflation-monetary or demand-based. The demand-based theory says that when aggregate demand (the total amount of goods and services demanded) decreases, prices will rise. The monetary theory says that inflation is always a monetary phenomenon, meaning that increases in the money supply cause inflation.

  • The inflation rate can be predicted by using the equation (*), which is related to the Cambridge equation.

  • The demand-based theory says that when aggregate demand decreases, people want to hold onto their money instead of spending it, which causes prices to rise. The monetary theory says that when the amount of money in an economy increases, people will want to invest in things like stocks and bonds, which will cause the prices of those things to go up.

  • Inflation is a rise in the prices of goods and services.

  • Monetarists believe that the main cause of inflation is an increase in the amount of money in circulation.

  • They argue that the rate of inflation is determined by the rate of growth of money supply relative to the rate of growth of GDP.

  • The theory of monetarism holds that the supply of money is independent of the level of monetary policy.

  • This theory suggests that prices are primarily determined by the amount of money in circulation and not by the level of monetary inflation.

  • The theory of the demand side of the market suggests that inflation is caused by an increase in the demand for money, beyond the amount that can be supplied.

  • This theory is based on the assumption that the demand for money is unrelated to the level of inflation.

  • The monetarist theory of the supply of money predicts that an increase in the supply of money will lead to an increase in prices.

  • The theory of the demand side of the market suggests that an increase in the demand for money will lead to an increase in prices, even if there is an increase in the supply of money.

  • The classical theory of inflation is that it is caused by an increase in the money supply.

  • The desarrollismo theory of inflation states that inflation is caused by a strong imbalance between exports and imports.

  • The austrian theory of inflation states that inflation is caused by an increase in the supply of money.

  • The desarrollismo theory of inflation is related to the theory of dependency, which posits that industrialization of primary materials (such as wheat, soybeans, lumber, oil) creates added value that can be exported, and reduces the gap between developed and developing countries.

  • The classical theory of inflation was limited by its reliance on the theory of comparative advantage, which assumed that countries traded goods and services based on their respective advantages.

  • The desarrollismo theory of inflation is based on the idea that industrialization of primary materials creates added value that can be exported, and that this creates a surplus of money that can cause inflation.

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