Price stability is when the general level of prices stays constant over time or grows at an acceptably low rate.
Cost of living is the price level of goods and services bought by the average family.
Inflation is a sustained rise in the general price level over time and a fall in real value of money
The rate of inflation is the percentage rise in the general price level over time.
Deflation – negative inflation or falling average prices , Disinflation – rate of increase in inflation is decreasing (price
level increasing but not going up as fast as they were b4)
A nominal value is a value of something in money terms , A real value takes inflation into account.
The consumer price index is a weighted index which is used to measure the rate of inflation by creating an index by
tracks the changes in the price of a basket of goods an average family might buy over the course of a year.
Analyse the Causes of Inflation
→ Demand-pull inflation
Happens when total demand rises faster than total supply in a country
Caused by increased incomes as consumers are able to buy more goods and services, which leads to increased
competition for the products, causing prices to rise.
This is more likely in an economy that is operating close to its maximum capacity as now the firms will be
unable to quickly respond to the increase in demand as the economy will be close to full employment,
meaning there are few workers to produce the extra output demanded.
Reduced taxation, decreased interest rates, general rise in consumer spending , improved availability of
credit , weak exchange rates (increase domestic demand for domestic goods and increase from foreign
demand for domestic goods) , fast growth in other countries (increase demand for UK exports), general rise in
confidence/expectations of future growth lots of confidence
→ Cost-push inflation
Happens when there is a rise in the costs of production and firms try to pass this on to consumers to maintain
profits, causing an increase in the general price level.
A fall in the exchange rate may increase the prices of any inputs into production that are imported.
A fall in productivity leads to a rise in average costs, as a higher proportion of a worker’s hourly wage is
needed to make a single unit of output.
An increase in trade union power may also lead to higher wages being negotiated-> increases COP, which
may lead to a rise in inflation.
Wage increase, high raw material costs, more taxes, natural disasters which can disrupt supply chain
Wage price spiral --? COP rises more inflation falling real incomes (real income falls if wage increase
fails to keep up with inflation ) workers bid for improved wages to protect real pay COP increases
more inflation ….
Cost push inflation can lead to stagflation - supply-side shocks like sudden increase in raw materials would
cause inflation, and firms may do labour shedding to maintain profit margins and reduce costs push inflation
and unemployment = stagflation
, Cost-Push Diagram Demand Pull Diagram
Evaluate the consequences of inflation
→ Consequences for consumers:
Loss of consumer confidence: Inflation makes it more difficult for consumers to value different goods and to
decide how to prioritise spending their income, so the uncertainty may stop them buying goods and services.
Shoe leather costs: as prices change with inflation, consumers and firms have to keep comparing prices of
different goods from different suppliers. This costs time and effort to find the best deals.
Fall in real income: if income rises at a slower rate than inflation, consumers will have less purchasing
power, and thus their standard of living falls.
Income redistribution: some workers may be able to negotiate higher wages during times of inflation so they
can maintain or increase their standard of living. However, many workers will not be able to get these wage
increase advantages.
Consumers as debtors: if consumers have borrowed money, the real value of the debt falls if there is
inflation. As the general price level increases, the opportunity cost of paying back the money falls as you now
can buy fewer things with the money owed. – as sir abt this point + pg. 161 top para
→ Consequences for producers:
Increased production costs: inflation may increase the price of inputs, increasing costs and possibly reducing
profits – however there is greater flexibility in setting wages cos workers may accept wage rise that does not
keep up with inflation + helps producers remain inflation
Menu costs: firms may have to update pricing information due to inflation which can increase costs.
Labour market disputes: if there is inflation, firms may need to spend more time negotiating wage rises with
workers, requiring wages for the negotiators and possibly increased pay for workers.
Lower exports: if inflation in the UK is higher than other countries, UK exports will seem relatively more
expensive to consumers abroad and thus they buy less from the UK. – but depends on quality of goods +
elasticity – if price inelastic demand, then ppl will still buy
Producers as creditors: if there is inflation, the real value of their loans to borrowers may fall – real value of
loan received is lower than real value of what they gave it out.
Producers as debtors: firms with debts may gain as the real value of their debt falls.
Loss of business confidence: if firms are uncertain about the prices of their input costs and the selling price
for their goods, this may make them reluctant to invest, which can lead to lower productivity.
Producers Eval:
Risk Mitigation for Inflation: for producers as debtors and creditors
Advantage: Variable interest rates provide a degree of protection for lenders against the impact of inflation.
Inflation can erode the purchasing power of money. If interest rates are variable and respond to inflation,
lenders can ensure that the returns they receive on loans adjust to the changing value of money.
Loss of business confidence eval: When inflation is a byproduct of increased demand and economic expansion,
businesses may view it positively as a sign of a healthy and growing economy. In such cases, the positive effects of
growth may outweigh concerns about inflation
→ Consequences for savers
Cost of living is the price level of goods and services bought by the average family.
Inflation is a sustained rise in the general price level over time and a fall in real value of money
The rate of inflation is the percentage rise in the general price level over time.
Deflation – negative inflation or falling average prices , Disinflation – rate of increase in inflation is decreasing (price
level increasing but not going up as fast as they were b4)
A nominal value is a value of something in money terms , A real value takes inflation into account.
The consumer price index is a weighted index which is used to measure the rate of inflation by creating an index by
tracks the changes in the price of a basket of goods an average family might buy over the course of a year.
Analyse the Causes of Inflation
→ Demand-pull inflation
Happens when total demand rises faster than total supply in a country
Caused by increased incomes as consumers are able to buy more goods and services, which leads to increased
competition for the products, causing prices to rise.
This is more likely in an economy that is operating close to its maximum capacity as now the firms will be
unable to quickly respond to the increase in demand as the economy will be close to full employment,
meaning there are few workers to produce the extra output demanded.
Reduced taxation, decreased interest rates, general rise in consumer spending , improved availability of
credit , weak exchange rates (increase domestic demand for domestic goods and increase from foreign
demand for domestic goods) , fast growth in other countries (increase demand for UK exports), general rise in
confidence/expectations of future growth lots of confidence
→ Cost-push inflation
Happens when there is a rise in the costs of production and firms try to pass this on to consumers to maintain
profits, causing an increase in the general price level.
A fall in the exchange rate may increase the prices of any inputs into production that are imported.
A fall in productivity leads to a rise in average costs, as a higher proportion of a worker’s hourly wage is
needed to make a single unit of output.
An increase in trade union power may also lead to higher wages being negotiated-> increases COP, which
may lead to a rise in inflation.
Wage increase, high raw material costs, more taxes, natural disasters which can disrupt supply chain
Wage price spiral --? COP rises more inflation falling real incomes (real income falls if wage increase
fails to keep up with inflation ) workers bid for improved wages to protect real pay COP increases
more inflation ….
Cost push inflation can lead to stagflation - supply-side shocks like sudden increase in raw materials would
cause inflation, and firms may do labour shedding to maintain profit margins and reduce costs push inflation
and unemployment = stagflation
, Cost-Push Diagram Demand Pull Diagram
Evaluate the consequences of inflation
→ Consequences for consumers:
Loss of consumer confidence: Inflation makes it more difficult for consumers to value different goods and to
decide how to prioritise spending their income, so the uncertainty may stop them buying goods and services.
Shoe leather costs: as prices change with inflation, consumers and firms have to keep comparing prices of
different goods from different suppliers. This costs time and effort to find the best deals.
Fall in real income: if income rises at a slower rate than inflation, consumers will have less purchasing
power, and thus their standard of living falls.
Income redistribution: some workers may be able to negotiate higher wages during times of inflation so they
can maintain or increase their standard of living. However, many workers will not be able to get these wage
increase advantages.
Consumers as debtors: if consumers have borrowed money, the real value of the debt falls if there is
inflation. As the general price level increases, the opportunity cost of paying back the money falls as you now
can buy fewer things with the money owed. – as sir abt this point + pg. 161 top para
→ Consequences for producers:
Increased production costs: inflation may increase the price of inputs, increasing costs and possibly reducing
profits – however there is greater flexibility in setting wages cos workers may accept wage rise that does not
keep up with inflation + helps producers remain inflation
Menu costs: firms may have to update pricing information due to inflation which can increase costs.
Labour market disputes: if there is inflation, firms may need to spend more time negotiating wage rises with
workers, requiring wages for the negotiators and possibly increased pay for workers.
Lower exports: if inflation in the UK is higher than other countries, UK exports will seem relatively more
expensive to consumers abroad and thus they buy less from the UK. – but depends on quality of goods +
elasticity – if price inelastic demand, then ppl will still buy
Producers as creditors: if there is inflation, the real value of their loans to borrowers may fall – real value of
loan received is lower than real value of what they gave it out.
Producers as debtors: firms with debts may gain as the real value of their debt falls.
Loss of business confidence: if firms are uncertain about the prices of their input costs and the selling price
for their goods, this may make them reluctant to invest, which can lead to lower productivity.
Producers Eval:
Risk Mitigation for Inflation: for producers as debtors and creditors
Advantage: Variable interest rates provide a degree of protection for lenders against the impact of inflation.
Inflation can erode the purchasing power of money. If interest rates are variable and respond to inflation,
lenders can ensure that the returns they receive on loans adjust to the changing value of money.
Loss of business confidence eval: When inflation is a byproduct of increased demand and economic expansion,
businesses may view it positively as a sign of a healthy and growing economy. In such cases, the positive effects of
growth may outweigh concerns about inflation
→ Consequences for savers
