gce a-level & ibeconomics · demand-pull inflation an increase in incomes in the economy will...
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InflationGCEA-LEVEL&IB ECONOMICS
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LessonStructure
◦MeasuringInflation◦LimitationsofCPI◦CausesofInflation◦Growthinmoneysupply◦ Demand-pullinflation◦ Cost-pushinflation
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InflationThinkaboutafavoriterestaurantyoutendtogotoovertheyears.
Howhavethepricesofthefoodtherechanged?
Whatotheritemsinyourdailyliveshaveseenpricerisesovertheyears?Discusswithyourneighbour andcomeupwith3thingsonyourminiwhiteboard.
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Inflation
Whattypeofgoods/servicesactuallycontributedtoinflationconsistentlyovertheyears?
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InflationWithinhousingandhouseholdservices,thelargestcontributionswerefromowneroccupiers’housingcosts(a0.19percentagepointcontributiontotheCPIH12-monthrate);andcounciltaxandrates(acontributionof0.12percentagepoints).Electricity,gasandotherfuelsandactualrentalsforhousingeachcontributed0.05percentagepoints.
Otherlargeupwardcontributionscamefromtransport,recreationandculture,andfromrestaurantsandhotels.FurtherreductionsinfuelpricescontinuedthedownwardtrendincontributionsfromtransportthatbeganinSeptember2018.Withinthesecategories,themostnotablecontributionswerefrompackageholidays,cateringservicesandtheoperationofpersonaltransportequipment.
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BasketofGoodsOnewaytomeasureinflationisbyusingthe________________________(CPI).It’sthegraphyoujustsaw!
Theindextakesinabasketofgoodsan_________householdwouldbuy,andcalculatethepricedifferenceyearonyeartocaptureinflation.
Notethatthemeasureisweighted accordingtotheproportionsofeachproduct.Thismeansitaccountsforthequantityandvalueofgoodsaswell.E.g.ifanaveragehouseholdbuys10eggsfor$0.5each,itwillinclude$0.5x10=$5costofeggsinthegrocerycategory.
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BasketofGoodsButhowdotheydeterminewhatisanaveragehousehold’sbasketofgoods?
Ahouseholdexpenditure__________iscompletedtodecideonthebasketofgoodsandattach__________basedontheproportionofgoodstheyspendtheirincomeson.
Curiousonwhatgoodsareincluded/removed?
https://webarchive.nationalarchives.gov.uk/20160109130531/http://www.ons.gov.uk/ons/infographics/basket-of-goods-2014/index.html
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LimitationsofCPILookupsomelimitationsoftheConsumerPriceIndexandfillintheblanksbelow!
- __________________________arenotincludedintheCPI,butisincludedintheRPI(_______________________)
- Becauseitisbasedonspendingofanaveragehousehold,actualinflationmaynotapplytofamilieswithhigherorlower___________
- CPIdoesnotincludeimprovementsinthe__________ofgoodsandservicesovertime,despitetheirpricesmayhaveincreased
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EquilibriumPriceLevelandOutput
RealGDP0
PriceLevel
AS
P
AD
Q
WouldanyoneliketoremindmeofhowtofindtheequilibriumpricelevelandrealGDPofaneconomy?
Whattypeofdiagramwillweuse?
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WelcometotheGRAZEEconomy!
Letusassumethatthiseconomyonlyproduces3Grazemini-biteseachyear.Eachstudentisahouseholdhopingtobuythesemini-bites.Thebuyerwhopaysthehighestpricewillgetthemini-bite.Let’sstartbidding!
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WelcometotheGRAZEEconomy!
Avg.priceofaGRAZEmini-biteYear1Year2 (GrowthinMoneySupply)
Inthesecondyear,thegovernmentdecidestoprintoutmorebanknotes.Asaresult,thisincreasesthemoneysupplycirculatingtheeconomy.Everyonegets$100more.Let’sbidagain– whatwillhappentothepriceofGRAZEmini-bites?
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GrowthofMoneySupplyThemoneysupplyistheamountofmoneycirculatingtheeconomyinagivenperiodoftime.Itnormallyincludescash,bankdepositsetc.
Anincreaseinthe______________tendstoleadto__________.Thereareafewreasonswhythereisalargeramountofmoneycirculatingtheeconomysuchas:
- BankofEnglandprintingmorebanknotes
- Decreaseininterestrates
- Bankslendingmoremoneyviaquantitativeeasing
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WelcometotheGRAZEEconomy!
Avg.priceofaGRAZEmini-biteYear1Year2 (GrowthinMoneySupply)Year3 (Increaseinconsumption)
Inthethirdyear,theeconomyisdoingwell.Householdhasrisingincomesandstarteddemandingmoregoodsandservices.Asaresult,mosthouseholdsarelookingtobuy2Grazemini-bites.Let’sbidagain– whatwillhappentothepriceofGRAZEmini-bites?
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Demand-PullInflation
Anincreaseinincomesintheeconomywillincreaseconsumptionandaggregatedemandaspeoplebecomericher.
WhenADincreases,pricesofgoodsandserviceswillbecomemoreexpensiveaspeoplearewillingtopaymoreforit,despitethereisnotanincreaseinthenumberofgoods.Thisiswhatwecall______________________.
RealGDP0
PriceLevel
AS
P1P
Q1
AD
Q
AD1
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Demand-PullInflationCanyouthinkoftwosituationswhentherewillbedemand-pullinflationapartfromanincreaseinincomes?Discusswithyourneighbour.
Hint:ThinkaboutwhenwillfactorsofADincrease.
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WelcometotheGRAZEEconomy!
Avg.priceofaGRAZEmini-biteYear1Year2 (GrowthinMoneySupply)Year3 (Increaseinconsumption)Year4(Productioncostsincrease)
Intheforthyear,worldpriceofoatsincreasedsignificantly.Asaresult,costofproductionincreasedsignificantlyandGrazehasdecidedtochargeatleast$300foreachmini-biteandcanonlyproduce2.Whatwillhappentothefinalprice?Let’sbid.
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Cost-PushInflation
Anincreaseincostsintheeconomywillincreasepriceofgoodsandservices.Notonlytherearelessgoods/servicesavailableintheeconomymakingthemmostcostly,butalsofirmsincreasetheirpricestoprotecttheirprofits.
Thisisknownas___________________
RealGDP0
PriceLevel
AS 1
P1P
AS
Q
AD
Q1
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Cost-PushInflationCanyouthinkoftwosituationswhentherewillbecost-pushinflationapartfromanincreaseinthecostofrawmaterials?Discusswithyourneighbour.
Hint:ThinkaboutwhenwillASdecrease.