Types of Inflation in Economics

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Questions and Answers

What is the effect of higher government spending and increased borrowing on the circular flow?

Reduced demand

Uncertain demand

No change in demand

Extra demand (correct)

Monetarist economists believe that inflation is caused by a shortage of goods in the economy.

False

What is cost-push inflation?

Cost-push inflation occurs when firms respond to rising costs by increasing prices in order to protect their profit margins.

A rise in commodity prices, such as oil, copper, and agricultural products, can lead to an increase in _______________________ costs.

component Signup and view all the answers

Match the following types of inflation with their causes:

Cost-push inflation = Expectations of inflation Demand-pull inflation = Higher government spending Signup and view all the answers

A fall in interest rates can lead to a decrease in demand for loans.

False Signup and view all the answers

What is the term used by the Bank of England to describe the effect of an initial rise in prices triggering a burst of higher pay claims?

Second-round effects Signup and view all the answers

What is the impact of low unemployment on wages?

Wages increase Signup and view all the answers

What is the term used to describe a moderate rate of inflation?

Creeping inflation Signup and view all the answers

Hyperinflation occurs when the price level rises at a moderate rate over a long period of time.

False Signup and view all the answers

What is the definition of galloping inflation according to Baumol and Blinder?

Galloping inflation refers to an inflation that proceeds at an exceptionally high rate. Signup and view all the answers

During a period of hyperinflation, the demand for money decreases drastically and paper currency becomes _______.

worthless Signup and view all the answers

What is the term used to describe an inflation rate of 50% per month?

Hyperinflation Signup and view all the answers

The modern approach to inflation follows the theory of price discrimination.

True Signup and view all the answers

Match the following types of inflation with their definitions:

Creeping inflation = A moderate rate of inflation over a long period Galloping inflation = An exceptionally high rate of inflation Hyperinflation = A rate of inflation exceeding 50% per month Signup and view all the answers

What is the result of an inflation rate of 50%?

A more than 100-fold increase in the price level over a year. Signup and view all the answers

What is another name for the effect of higher indirect taxes on inflation?

Wage-price effect Signup and view all the answers

A fall in the exchange rate can cause demand-pull inflation.

False Signup and view all the answers

What is the term for inflation caused by dominant firms in a market using their market power to increase prices?

Profit-push inflation Signup and view all the answers

A rise in _______ can lead to cost-push inflation.

Value Added Tax Signup and view all the answers

Match the following types of inflation with their causes:

Cost-push inflation = Higher indirect taxes or a fall in the exchange rate Profit-push inflation = Monopoly employers using their market power Demand-pull inflation = Increase in aggregate demand Signup and view all the answers

Which of the following is NOT a cause of inflation?

A decrease in unemployment Signup and view all the answers

Study Notes

Types of Inflation

Inflation refers to a considerable and persistent rise in the general price level over a period of time.
Inflation can be classified based on its rate and causes.

Moderate Inflation

Occurs when the general level of price rises at a moderate rate over a long period of time.
Moderate rate of inflation may vary from country to country, but a single digit rate of annual inflation is typically considered moderate.
Also known as creeping inflation.

Galloping Inflation

Refers to an inflation that proceeds at an exceptionally high rate.
According to Baumol and Blinder, galloping inflation is an inflation that proceeds at an exceptionally high rate, but they do not specify what rate of inflation is 'exceptionally high'.
According to Samuelson and Nordhaus, inflation in the double- or triple-digit range of 20, 100, or 200 per cent a year is labelled galloping inflation.

Hyper Inflation

Occurs when prices rise at more than three-digit rate per annum.
According to some economists, hyperinflation is often defined as inflation that exceeds 50% per month.
During hyperinflation, paper currency becomes worthless and demand for money decreases drastically.

Causes of Inflation

Higher government spending and increased borrowing can create extra demand in the circular flow.
Monetary stimulus to the economy, such as a fall in interest rates, can stimulate too much demand.
Monetarist economists believe that inflation is caused by "too much money chasing too few goods" and that governments can lose control of inflation if they allow the financial system to expand the money supply too quickly.

Cost Push Inflation

Occurs when firms respond to rising costs by increasing prices to protect their profit margins.
Causes of cost-push inflation include:
- Rising component costs, e.g. increase in raw materials and other components.
- Rising labor costs, e.g. wage increases greater than improvements in productivity.
- Expectations of inflation, e.g. people asking for higher pay to protect their real incomes.
- Higher indirect taxes, e.g. rise in duty on alcohol, fuels, and cigarettes.
- A fall in the exchange rate, leading to an increase in prices of imported products.
- Monopoly employers/profit-push inflation, where dominant firms use their market power to increase prices above costs.

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Description

This quiz covers the different types of inflation, including hyperinflation, and their classification based on rate and causes. Understand the concept of inflation and its impact on the economy.