Podcast
Questions and Answers
Which of the following factors is NOT a primary cause of cost-push inflation?
Which of the following factors is NOT a primary cause of cost-push inflation?
- Exchange Rate Depreciation
- Wage-Push Inflation
- Increase in Raw Material Prices
- Increased Consumer Spending (correct)
How does a depreciation of a country's currency contribute to cost-push inflation?
How does a depreciation of a country's currency contribute to cost-push inflation?
- It increases the cost of imported goods, leading to higher production costs. (correct)
- It increases the demand for domestic goods, leading to higher prices.
- It decreases the cost of imported goods, leading to lower production costs.
- It decreases the demand for domestic goods, leading to lower prices.
Which of the following economic policies is most likely to contribute to demand-pull inflation?
Which of the following economic policies is most likely to contribute to demand-pull inflation?
- Imposing price controls
- Raising interest rates
- Increasing government spending (correct)
- Reducing the money supply
How does increased investment contribute to demand-pull inflation?
How does increased investment contribute to demand-pull inflation?
What is the key difference between cost-push inflation and demand-pull inflation?
What is the key difference between cost-push inflation and demand-pull inflation?
What is the effect of cost-push inflation on aggregate supply (AS)?
What is the effect of cost-push inflation on aggregate supply (AS)?
Which of the following is an example of a supply chain disruption that could lead to cost-push inflation?
Which of the following is an example of a supply chain disruption that could lead to cost-push inflation?
Which of the following is NOT a consequence of cost-push inflation?
Which of the following is NOT a consequence of cost-push inflation?
What primarily causes cost-push inflation?
What primarily causes cost-push inflation?
In a resource-scarce economy, a depreciation of the currency is more likely to lead to which type of inflation?
In a resource-scarce economy, a depreciation of the currency is more likely to lead to which type of inflation?
What is a common consequence of high inflation
What is a common consequence of high inflation
What effect does an appreciation of currency typically have on cost-push inflation?
What effect does an appreciation of currency typically have on cost-push inflation?
Which of the following can directly lead to demand-pull inflation?
Which of the following can directly lead to demand-pull inflation?
How does a depreciation in exchange rates affect import prices?
How does a depreciation in exchange rates affect import prices?
Which situation is most likely to encourage demand-pull inflation?
Which situation is most likely to encourage demand-pull inflation?
What is a major consequence of cost-push inflation?
What is a major consequence of cost-push inflation?
What is a key characteristic of demand-pull inflation?
What is a key characteristic of demand-pull inflation?
What factor is least likely to contribute to cost-push inflation?
What factor is least likely to contribute to cost-push inflation?
Which condition is likely to indicate the occurrence of demand-pull inflation?
Which condition is likely to indicate the occurrence of demand-pull inflation?
Which of the following best describes the relationship between exchange rates and inflation?
Which of the following best describes the relationship between exchange rates and inflation?
In an economy heavily reliant on imported goods, how does inflation primarily manifest?
In an economy heavily reliant on imported goods, how does inflation primarily manifest?
What type of inflation occurs when overall demand in the economy exceeds supply?
What type of inflation occurs when overall demand in the economy exceeds supply?
How does depreciation of the currency influence cost-push inflation?
How does depreciation of the currency influence cost-push inflation?
What is the potential effect of a weaker currency on domestic consumption?
What is the potential effect of a weaker currency on domestic consumption?
Which of the following is a consequence of the wage-price spiral?
Which of the following is a consequence of the wage-price spiral?
What happens to aggregate demand when a country's currency depreciates?
What happens to aggregate demand when a country's currency depreciates?
How can an appreciation of the currency reduce cost-push inflation?
How can an appreciation of the currency reduce cost-push inflation?
Which factor does NOT directly contribute to demand-pull inflation?
Which factor does NOT directly contribute to demand-pull inflation?
Which scenario exemplifies demand-pull inflation due to changes in exchange rates?
Which scenario exemplifies demand-pull inflation due to changes in exchange rates?
What can be a result of higher interest rates in response to currency depreciation?
What can be a result of higher interest rates in response to currency depreciation?
Which effect does a strong currency have on the exports of a country?
Which effect does a strong currency have on the exports of a country?
What type of inflation typically arises from rising production costs?
What type of inflation typically arises from rising production costs?
Which factor is NOT an external influence on inflation?
Which factor is NOT an external influence on inflation?
What is one impact of a depreciation on import prices?
What is one impact of a depreciation on import prices?
How could a strengthening currency affect domestic wage trends?
How could a strengthening currency affect domestic wage trends?
What is a primary internal consequence of high inflation that affects fixed-income individuals the most?
What is a primary internal consequence of high inflation that affects fixed-income individuals the most?
Which of the following describes the wage-price spiral?
Which of the following describes the wage-price spiral?
How does high inflation especially impact savings?
How does high inflation especially impact savings?
What consequence of high inflation leads to a decline in a country's competitiveness in international trade?
What consequence of high inflation leads to a decline in a country's competitiveness in international trade?
What is one possible outcome of capital flight resulting from high inflation?
What is one possible outcome of capital flight resulting from high inflation?
Which internal consequence of high inflation may lead to social unrest in a consumption-driven economy?
Which internal consequence of high inflation may lead to social unrest in a consumption-driven economy?
What can result from a reduction in investment due to uncertainty caused by high inflation?
What can result from a reduction in investment due to uncertainty caused by high inflation?
In an economy with high inflation, what is the primary effect on the balance of payments?
In an economy with high inflation, what is the primary effect on the balance of payments?
What does exchange rate volatility often result from in high inflation economies?
What does exchange rate volatility often result from in high inflation economies?
For economies with lower foreign trade dependency, what internal consequence of high inflation may be more detrimental?
For economies with lower foreign trade dependency, what internal consequence of high inflation may be more detrimental?
Which of the following is NOT an internal consequence of high inflation?
Which of the following is NOT an internal consequence of high inflation?
What can be a significant external consequence for small economies that rely heavily on exports during periods of high inflation?
What can be a significant external consequence for small economies that rely heavily on exports during periods of high inflation?
How can high inflation impact long-term economic growth in a country with significant household debt?
How can high inflation impact long-term economic growth in a country with significant household debt?
How does currency depreciation due to inflation affect countries that heavily rely on imports?
How does currency depreciation due to inflation affect countries that heavily rely on imports?
Which external consequence of inflation could lead to a worse trade deficit?
Which external consequence of inflation could lead to a worse trade deficit?
Which of the following is a potential problem caused by deflation?
Which of the following is a potential problem caused by deflation?
What impact does deflation typically have on consumer behavior?
What impact does deflation typically have on consumer behavior?
What is a significant effect of inflation on price signals within the economy?
What is a significant effect of inflation on price signals within the economy?
One of the outcomes of a wage-price spiral during inflation is:
One of the outcomes of a wage-price spiral during inflation is:
How does high inflation affect investment decisions in an economy?
How does high inflation affect investment decisions in an economy?
What is a potential consequence of high inflation for individuals on fixed incomes?
What is a potential consequence of high inflation for individuals on fixed incomes?
What long-term issue can arise from persistent deflation?
What long-term issue can arise from persistent deflation?
Which of the following is NOT a consequence of inflation?
Which of the following is NOT a consequence of inflation?
What is a key challenge for policymakers during deflationary periods?
What is a key challenge for policymakers during deflationary periods?
What is a result of higher input costs due to currency depreciation in import-reliant economies?
What is a result of higher input costs due to currency depreciation in import-reliant economies?
Which factor can contribute to wage inequality during periods of inflation?
Which factor can contribute to wage inequality during periods of inflation?
What is a psychological effect of deflation on consumers?
What is a psychological effect of deflation on consumers?
High inflation can lead to which of the following scenarios concerning investments?
High inflation can lead to which of the following scenarios concerning investments?
What is a potential negative impact of high inflation on exports?
What is a potential negative impact of high inflation on exports?
Why is deflation considered more damaging than inflation in the long term?
Why is deflation considered more damaging than inflation in the long term?
Which of the following is a common consequence of rising inflation?
Which of the following is a common consequence of rising inflation?
What do high inflation rates encourage investors to do?
What do high inflation rates encourage investors to do?
How might supply-side policies help combat inflation?
How might supply-side policies help combat inflation?
What is a risk associated with hyperinflation?
What is a risk associated with hyperinflation?
Which aspect of inflation can lead to inefficiencies in resource allocation?
Which aspect of inflation can lead to inefficiencies in resource allocation?
What effect does inflation generally have on debt repayment for borrowers?
What effect does inflation generally have on debt repayment for borrowers?
What effect can deflation have on overall consumer behavior?
What effect can deflation have on overall consumer behavior?
What is one potential effect of rising import prices during high inflation?
What is one potential effect of rising import prices during high inflation?
Which supply-side policy focuses specifically on improving labor productivity?
Which supply-side policy focuses specifically on improving labor productivity?
What might be a consequence of investors engaging in speculative behavior during inflation?
What might be a consequence of investors engaging in speculative behavior during inflation?
What is a potential result of reduced international competitiveness due to high inflation?
What is a potential result of reduced international competitiveness due to high inflation?
What is a potential negative side effect of supply-side policies?
What is a potential negative side effect of supply-side policies?
How do demand-side policies differ from supply-side policies in terms of their effect on inflation?
How do demand-side policies differ from supply-side policies in terms of their effect on inflation?
What is an internal effect of inflation on purchasing power?
What is an internal effect of inflation on purchasing power?
What consequence can occur due to the wage-price spiral during inflation?
What consequence can occur due to the wage-price spiral during inflation?
How does inflation distort the price mechanism in an economy?
How does inflation distort the price mechanism in an economy?
What can be a direct impact of high inflation on business investment?
What can be a direct impact of high inflation on business investment?
Which of the following may happen if businesses cannot pass on increased costs during inflation?
Which of the following may happen if businesses cannot pass on increased costs during inflation?
What external effect of inflation can result from an appreciation of the real exchange rate?
What external effect of inflation can result from an appreciation of the real exchange rate?
Which factor is crucial for the success of supply-side policies in controlling inflation?
Which factor is crucial for the success of supply-side policies in controlling inflation?
Which characteristic describes the long-term effect of supply-side policies on inflation?
Which characteristic describes the long-term effect of supply-side policies on inflation?
What could be a potential outcome of inflation for consumers on fixed incomes?
What could be a potential outcome of inflation for consumers on fixed incomes?
What is an important consideration when implementing supply-side policies?
What is an important consideration when implementing supply-side policies?
Which of the following best describes a consequence of increased uncertainty due to high inflation?
Which of the following best describes a consequence of increased uncertainty due to high inflation?
How can high inflation affect foreign investment in an economy?
How can high inflation affect foreign investment in an economy?
What effect does inflation have on a country's currency in foreign exchange markets?
What effect does inflation have on a country's currency in foreign exchange markets?
What is a potential impact of inflation on a country’s trade balance?
What is a potential impact of inflation on a country’s trade balance?
How does inflation lead to trade imbalances over time?
How does inflation lead to trade imbalances over time?
Which of the following describes a serious internal effect of inflation?
Which of the following describes a serious internal effect of inflation?
What are potential long-term consequences for an economy that has persistent trade imbalances due to inflation?
What are potential long-term consequences for an economy that has persistent trade imbalances due to inflation?
What role does monetary policy play in combating inflation?
What role does monetary policy play in combating inflation?
Which of the following best describes the relationship between internal and external effects of inflation?
Which of the following best describes the relationship between internal and external effects of inflation?
What challenge does a depreciating currency pose for an economy reliant on imports?
What challenge does a depreciating currency pose for an economy reliant on imports?
How can persistent internal effects of inflation impact standard of living?
How can persistent internal effects of inflation impact standard of living?
What happens to an economy with high inflation when it loses international competitiveness?
What happens to an economy with high inflation when it loses international competitiveness?
In what way can inflation affect long-term investment decisions?
In what way can inflation affect long-term investment decisions?
What contributions can fiscal policy make in managing inflation?
What contributions can fiscal policy make in managing inflation?
How can inflation create instability in an economy?
How can inflation create instability in an economy?
Which of the following is NOT a primary way in which supply-side policies aim to address inflation?
Which of the following is NOT a primary way in which supply-side policies aim to address inflation?
How can labor market reforms contribute to reducing inflationary pressure?
How can labor market reforms contribute to reducing inflationary pressure?
Which of the following is a potential disadvantage of supply-side policies in addressing inflation?
Which of the following is a potential disadvantage of supply-side policies in addressing inflation?
How do supply-side policies affect the long-run aggregate supply (LRAS) curve?
How do supply-side policies affect the long-run aggregate supply (LRAS) curve?
What is the primary reason why supply-side policies may not be effective in addressing inflation in the short term?
What is the primary reason why supply-side policies may not be effective in addressing inflation in the short term?
Which type of inflation are supply-side policies particularly effective in addressing?
Which type of inflation are supply-side policies particularly effective in addressing?
Which of the following is NOT an example of a supply-side policy?
Which of the following is NOT an example of a supply-side policy?
How does increased competition within markets contribute to lower inflation?
How does increased competition within markets contribute to lower inflation?
What is a potential consequence of labor market reforms that increase flexibility?
What is a potential consequence of labor market reforms that increase flexibility?
Which of the following is NOT a common criticism of supply-side policies?
Which of the following is NOT a common criticism of supply-side policies?
Which of the following is a reason why supply-side policies alone might not be sufficient to address inflation?
Which of the following is a reason why supply-side policies alone might not be sufficient to address inflation?
Which of the following is an example of a policy that could potentially exacerbate income inequality?
Which of the following is an example of a policy that could potentially exacerbate income inequality?
How can supply-side policies contribute to solving cost-push inflation?
How can supply-side policies contribute to solving cost-push inflation?
Which of the following is NOT a potential outcome of investing in infrastructure?
Which of the following is NOT a potential outcome of investing in infrastructure?
Which of the following best describes the relationship between supply-side policies and demand-side policies in addressing inflation?
Which of the following best describes the relationship between supply-side policies and demand-side policies in addressing inflation?
Which of the following factors can lead to demand-pull inflation in the UK?
Which of the following factors can lead to demand-pull inflation in the UK?
Which of the following is NOT a contributing factor to cost-push inflation in the UK?
Which of the following is NOT a contributing factor to cost-push inflation in the UK?
How does a lower interest rate set by the Bank of England contribute to inflation?
How does a lower interest rate set by the Bank of England contribute to inflation?
Which of the following scenarios would MOST LIKELY lead to cost-push inflation?
Which of the following scenarios would MOST LIKELY lead to cost-push inflation?
Which of the following is NOT a potential consequence of a depreciation of the British pound?
Which of the following is NOT a potential consequence of a depreciation of the British pound?
How can expectations of future price hikes contribute to inflation?
How can expectations of future price hikes contribute to inflation?
What is the main difference between demand-pull inflation and cost-push inflation?
What is the main difference between demand-pull inflation and cost-push inflation?
What is the most likely effect of a significant increase in the global price of oil on the general price level in the UK?
What is the most likely effect of a significant increase in the global price of oil on the general price level in the UK?
Which of the following policies would MOST LIKELY be effective in mitigating the effects of demand-pull inflation?
Which of the following policies would MOST LIKELY be effective in mitigating the effects of demand-pull inflation?
Which of the following scenarios is MOST LIKELY to lead to a decrease in the general price level in the UK (deflation)?
Which of the following scenarios is MOST LIKELY to lead to a decrease in the general price level in the UK (deflation)?
How can structural changes in the economy impact the general price level?
How can structural changes in the economy impact the general price level?
Which of the following is an example of a supply shock that could lead to higher prices?
Which of the following is an example of a supply shock that could lead to higher prices?
Which of the following factors is MOST LIKELY to impact the general price level in the UK through its influence on the exchange rate?
Which of the following factors is MOST LIKELY to impact the general price level in the UK through its influence on the exchange rate?
What is the most likely reason for the UK to experience a period of inflation after the Brexit referendum?
What is the most likely reason for the UK to experience a period of inflation after the Brexit referendum?
Which of the following is a factor that could contribute to BOTH demand-pull and cost-push inflation?
Which of the following is a factor that could contribute to BOTH demand-pull and cost-push inflation?
Flashcards
Cost-Push Inflation
Cost-Push Inflation
Inflation caused by rising production costs leading to decreased aggregate supply.
Causes of Cost-Push Inflation
Causes of Cost-Push Inflation
Includes rising raw materials, wage increases, exchange rate depreciation, and supply chain disruptions.
Increase in Raw Material Prices
Increase in Raw Material Prices
Higher costs of key inputs increase production costs, resulting in higher prices for consumers.
Wage-Push Inflation
Wage-Push Inflation
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Exchange Rate Depreciation
Exchange Rate Depreciation
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Demand-Pull Inflation
Demand-Pull Inflation
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Increased Consumer Spending
Increased Consumer Spending
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Key Differences: Cost vs. Demand-Pull Inflation
Key Differences: Cost vs. Demand-Pull Inflation
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Aggregate Supply Shift
Aggregate Supply Shift
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Aggregate Demand Shift
Aggregate Demand Shift
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Policy Responses to Inflation
Policy Responses to Inflation
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Reducing Production Costs
Reducing Production Costs
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Contractionary Monetary Policy
Contractionary Monetary Policy
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Consumer Spending Impact
Consumer Spending Impact
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Government Expenditure Effect
Government Expenditure Effect
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Rising Input Costs
Rising Input Costs
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Expectations of Future Prices
Expectations of Future Prices
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Exchange Rate Impact
Exchange Rate Impact
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Supply Shocks
Supply Shocks
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Structural Economic Changes
Structural Economic Changes
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Global Inflationary Pressures
Global Inflationary Pressures
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Inflation Influencers
Inflation Influencers
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Exchange Rate Movements
Exchange Rate Movements
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Currency Depreciation
Currency Depreciation
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Import Prices Rise
Import Prices Rise
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Wage-Price Spiral
Wage-Price Spiral
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Impact on Exports
Impact on Exports
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Domestic Consumption Increase
Domestic Consumption Increase
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Foreign Investment Attraction
Foreign Investment Attraction
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Central Bank Response
Central Bank Response
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Impact of Currency Appreciation
Impact of Currency Appreciation
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Reduced Demand for Exports
Reduced Demand for Exports
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Shifts in Consumer Behavior
Shifts in Consumer Behavior
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Overall Price Level
Overall Price Level
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Effects of Exchange Rate Changes
Effects of Exchange Rate Changes
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Depreciation of Currency
Depreciation of Currency
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Appreciation of Currency
Appreciation of Currency
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Cost-Push Inflation Causes
Cost-Push Inflation Causes
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Demand-Pull Inflation Causes
Demand-Pull Inflation Causes
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Limited Natural Resources
Limited Natural Resources
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Inflation Definition
Inflation Definition
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Impact of High Inflation
Impact of High Inflation
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Import Prices and Inflation
Import Prices and Inflation
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Domestic Production Limits
Domestic Production Limits
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Consequences of High Inflation
Consequences of High Inflation
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Resource-Scarce Countries
Resource-Scarce Countries
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Government Expenditure Impact
Government Expenditure Impact
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External Consequences of Inflation
External Consequences of Inflation
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Internal Consequences of Inflation
Internal Consequences of Inflation
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Deflation
Deflation
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Reduced Consumer Spending
Reduced Consumer Spending
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Increased Real Debt Burden
Increased Real Debt Burden
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Falling Wages and Unemployment
Falling Wages and Unemployment
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Negative Impact on Investment
Negative Impact on Investment
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Economic Stagnation
Economic Stagnation
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Erosion of Purchasing Power
Erosion of Purchasing Power
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Uncertainty and Reduced Investment (Inflation)
Uncertainty and Reduced Investment (Inflation)
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Balance of Payments Issues
Balance of Payments Issues
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Capital Flight
Capital Flight
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Investment Uncertainty
Investment Uncertainty
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Reduced Purchasing Power
Reduced Purchasing Power
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Fixed Incomes
Fixed Incomes
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Uncertainty in Investment
Uncertainty in Investment
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Distortion of Price Signals
Distortion of Price Signals
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Erosion of Savings
Erosion of Savings
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International Competitiveness
International Competitiveness
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Balance of Payments Problems
Balance of Payments Problems
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Exchange Rate Volatility
Exchange Rate Volatility
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Social Unrest
Social Unrest
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Domestic Consumption
Domestic Consumption
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Foreign Direct Investment (FDI)
Foreign Direct Investment (FDI)
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Profitability Decline
Profitability Decline
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Income Inequality
Income Inequality
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Inflation Cycle
Inflation Cycle
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Hyperinflation
Hyperinflation
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Price Signals Distortion
Price Signals Distortion
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Economic Inefficiency
Economic Inefficiency
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Domestic Currency Depreciation
Domestic Currency Depreciation
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Trade Deficit
Trade Deficit
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Debt Impact of Deflation
Debt Impact of Deflation
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Mild Inflation Benefits
Mild Inflation Benefits
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Challenges of Deflation
Challenges of Deflation
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Deregulation
Deregulation
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Tax Cuts
Tax Cuts
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Privatization
Privatization
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Education Investment
Education Investment
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Supply-Side Policies
Supply-Side Policies
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Impact of Inflation on Competitiveness
Impact of Inflation on Competitiveness
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Reducing Trade Union Power
Reducing Trade Union Power
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Lowering Production Costs
Lowering Production Costs
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Improving Efficiency
Improving Efficiency
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Increasing Competition
Increasing Competition
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Encouraging Investment
Encouraging Investment
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Long-Term Impact
Long-Term Impact
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Structural Unemployment
Structural Unemployment
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Demand-Side Policies
Demand-Side Policies
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Effectiveness Timeline
Effectiveness Timeline
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Aggregate Supply Curve Shift
Aggregate Supply Curve Shift
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Infrastructure Investment
Infrastructure Investment
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Current Account Deficit
Current Account Deficit
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Foreign Investment Decline
Foreign Investment Decline
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Trade Imbalances
Trade Imbalances
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Purchasing Power Erosion
Purchasing Power Erosion
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Policy Interventions
Policy Interventions
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Long-term Economic Challenges
Long-term Economic Challenges
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External vs. Internal Effects
External vs. Internal Effects
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Capital Inflows
Capital Inflows
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Domestic Inflation Increase
Domestic Inflation Increase
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Loss of International Competitiveness
Loss of International Competitiveness
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Economic Stability Impact
Economic Stability Impact
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Exchange Rate Pressure
Exchange Rate Pressure
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Foreign Currency Reserves
Foreign Currency Reserves
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Immediate Effects of Demand-Side Policies
Immediate Effects of Demand-Side Policies
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Risk of Inequality
Risk of Inequality
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Increased Costs for Businesses
Increased Costs for Businesses
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Uncertainty and Reduced Investment
Uncertainty and Reduced Investment
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Long-Term Effects of Supply-Side Policies
Long-Term Effects of Supply-Side Policies
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Inflationary Pressures
Inflationary Pressures
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Complementary Measures
Complementary Measures
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Cost-Push vs. Demand-Pull
Cost-Push vs. Demand-Pull
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Study Notes
Cost-Push Inflation
- Occurs when production costs increase, leading to a decrease in aggregate supply (AS) and higher prices.
- Causes: increase in raw material prices, wage-push inflation (e.g. strong unions), exchange rate depreciation, supply chain disruptions.
Demand-Pull Inflation
- Occurs when aggregate demand (AD) exceeds aggregate supply (AS), creating higher prices.
- Causes: increased consumer spending, government spending, monetary expansion (lower interest rates), increased investment.
Key Differences (Cost-Push vs. Demand-Pull)
- Source: Cost-push inflation is from rising production costs; demand-pull inflation is from excess demand.
- Aggregate Supply/Demand: Cost-push leads to a leftward shift in AS; demand-pull leads to a rightward shift in AD.
- Policy Responses: Cost-push requires policies to reduce production costs; demand-pull requires policies to reduce aggregate demand.
UK Price Level Changes
- Factors affecting general price level (inflation/deflation): aggregate demand (AD) and aggregate supply (AS)
- Demand-Pull Inflation (UK):
- Increased consumer spending (higher confidence/income).
- Government expenditure (e.g. stimulus measures).
- Monetary policy (low interest rates, increasing borrowing).
- Cost-Push Inflation (UK):
- Rising input costs (e.g., raw materials, energy).
- Higher wage demands.
- Exchange rate depreciation (increased import costs).
- Exchange Rate Movements:
- Currency depreciation increases import costs, contributing to cost-push inflation.
- Supply Shocks:
- Disruptions (e.g., natural disasters, pandemics) affect availability and increase prices.
- Structural Changes:
- Shift from manufacturing to services affects pricing.
- Expectations:
- Anticipated price increases can lead to increased costs and wages.
- External Factors (Global Inflation):
- Global inflationary trends affect UK import prices.
Exchange Rate and Inflation
- Cost-Push: Currency depreciation increases import costs, raising production costs and prices.
- Demand-Pull: Currency depreciation makes exports cheaper, increasing demand and potentially raising domestic prices.
- Currency appreciation lowers import costs, mitigating cost-push inflation and potentially reducing demand-pull inflation (by decreasing demand for exports)
Inflation in a Resource-Scarce Country
- A depreciating exchange rate is more likely to cause cost-push inflation in resource-scarce economies due to their heavy dependence on imported goods and raw materials.
Consequences of High Inflation
- Internal: Reduced purchasing power, uncertainty/reduced investment, wage-price spiral, distorted price signals, erosion of savings.
- External: Reduced international competitiveness, capital flight and reduced foreign investment, balance of payments problems, exchange rate volatility.
Deflation vs. Inflation
- Deflation: Sustained decrease in prices, causing reduced consumer spending, increased real debt burden, falling wages/unemployment, negative impact on investment, economic stagnation.
- Inflation: Sustained increase in prices, reducing purchasing power, creates uncertainty/reduces investment, wage-price spiral, distorts price signals, and reduces international competitiveness.
Effectiveness of Supply-Side Policies
- Long-term impact: Supply-side policies (e.g. deregulation, tax cuts, education improvements) improve long-term productive capacity but may have delayed effects on inflation.
- Potential problems: Can cause structural unemployment or worsen income inequality.
- Effectiveness and type of inflation: Most effective for cost-push inflation, less effective when inflation is demand-pull.
Internal vs. External Effects of Inflation
- Internal: Reduced purchasing power, distorted price signals, business costs, wage-price spirals. Less manageable but more achievable if short-term inflation is the focus
- External: Loss of competitiveness, reduced foreign investment, exchange rate issues, trade imbalances. More serious impact for trade-reliant economies.
- Interconnection: Internal and external effects frequently interact and influence each other.
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Description
Test your knowledge on the concepts of cost-push and demand-pull inflation. This quiz covers the primary causes, effects on aggregate supply, and real-world examples. Gain a deeper understanding of how inflation dynamics influence the economy.
