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AS Economics
Areas to focus on
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Key Issues
The meaning of inflation Measuring the general price level Deflation and hyperinflation Causes of inflation (demand pull and cost push) Controlling inflation demand and supply-side policies Recent trends in UK inflation Why has inflation in the UK remained so low?
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Defining inflation
Inflation is a sustained increase in the average price level of a country. The rate of inflation is measured by the annual percentage change in the level of prices as measured by the consumer price index. A sustained fall in the general price level is called deflation in this situation, the rate of inflation becomes negative.
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Watch this & make notes on what have been the causes of inflation
Demand-pull inflation
Occurs when there is excess AD i.e. when there is a positive output gap (actual GDP > Potential GDP) Businesses respond to high demand by raising prices to increase their profit margins Demand-pull inflation is associated with the boom phase of the cycle (when SRAS becomes inelastic) The main causes of demand pull inflation
Very fast growth of demand for credit / borrowing High levels of consumer spending
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AD
Y1
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SRAS
AD1 AD
Y1
Y2
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SRAS
In the SR the economy can work overtime, at a slightly higher cost (overtime)
AD1 AD
Y1
Y2
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SRAS
AD1 AD
In the LR, workers are not willing to sacrifice Leisure time for more overtime. But still have high wage expectations. demand pull inflation
Y1
Y2
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To your notes..
Draw the AD/AS diagram (s) and add your own explanation of what happens
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SRAS1
Y2
Y1
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Average Earnings
Average earnings
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SRAS2
SRAS
Yfe
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P2 Pe
SRAS2
SRAS AD1
Y2
Y1
Yfe
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The NICE-1990s!
In the 1990s, the UK experienced a noninflationary consistently expansionary - or "nice" - decade; a decade in which growth was a little above trend, unemployment fell steadily, and cheaper imports allowed consumers to enjoy rising living standards without the need to ask for inflationary pay claims Mervyn King, Governor of the Bank of England
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4 3 CPI Inflation 2 1 0 97 98 99 00 01 02 03 04 05 06
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35
30
25
Percent per Annum
20
15
10
0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
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Homework
Read article about Economic Cycle Highlight key issues use 2 different colours highlight positives & negative issues Make a summary of the key issues raised Complete Q 1, 2 & 4 only.
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Further knowledge
http://www.bbc.co.uk/iplayer/episode/b00r92bp/Select_ Committees_Inflation_Report_Committee/ If you are really interested in what happens with the BoE in managing inflation watch this select committee meeting. Listen to this reasons why inflation can be good for the economy
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Inflation Qs
What is meant by Inflation? (2) Explain how inflation is measured? (2) Explain how a fall in the rate of unemployment might effect the rate of inflation? (8 marks) Using AD/AS analysis, assess the implications of a fall in AD on the UK economy? (8 marks)
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