Inflation definitions
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| General Price Level Rise | An increase in the average of all prices in the economy, usually measured by a price index, if the CPI increase, inflation has occurred.
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| Inflation | A sustained (persistent or ongoing) increase in the General Price Level.
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| Particular Price Rise | A price change of one particular good which occurs in the marker for that good only and does not constitute inflation
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| Delation | A fall in the general price level (negative in prices, eg. -2%)
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| Disinflation | A slowing in the rate of inflation from one time period to another.
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| Quantity Theory of Money | The theory that the general price level in an economy is directly related to the money supply and move in proportion to each other, when other factors are fixed.
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| Money Supply | The total amount of money in circulation in an economy.
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| Cost Push Inflation | Inflation caused by increased costs contributing to increased prices as producers attempt to cover their increasing expenses, by passing on the higher price to consumers. (AS shifts to the left).
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| Demand Pull Inflation | Inflation caused by extra demand for good and services, exceeding the abiity of the economy to produce them as consumers push up prices. General price level is pushed up and value of real income (purchasing power) falls. (AD shifts right)
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| Producer Price Index | An alternative measure of inflation that monitors prices paid by producers for materials, fuel rent and business services. Used by businesses when dealing with inflation as it is more relevant than the CPI.
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| Consumer Price Index | A weighted index measuring the changes in the cost of living in NZ households , undertaken quarterly. Official measure of inflation.
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| Acceptable | Characteristic of money that means it is readily accepted as payment
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| Divisible | Characteristic of money that means it is available in different denominations.
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| Durable | Characteristic of money that means it is made of material that is capable of lasting physically a long time with repeated use.
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| Medium of Exchange | Function of money that enables money to be used by individuals or groups, to act as an exchange for goods and services, that they do not produce themselves.
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| Store of Value | Function of money that enables money to be put aside now, and know that some time in the future, it will buy the same quantity of goods it did. Inflation erodes this function, which is why it must be controlled to a stable level.
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| Measure of Value | Function of money that enables us to exchange goods of equivalent value and money enables us to do this by establishing values for goods and services.
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| Monetary Policy | Action taken to control the money supply through changing the interest rates that will influence the level of credit in the economy which can slow down or stimulate economic activity.
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| Reserve Bank of NZ | The central bank that controls the circulaes currency eg. notes and coins; all bank deposits and borrowing needs through the use of settlement account. These accounts enable money to be transferred between banks overnight. Also operates to achieve ps.
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| Official Cash Rate | the wholesale interest rate paid on settlement accounts, offered to banks by the RBNZ which influences interest rates for retail customers ed house mortgages and business lending. Main tool used for controlling inflation in NZ
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| Factor Costs | The cost of producing goods and services including raw materials and wages/salaries
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| Overseas prices | If overseas countries are experiencing inflation, NZ may be forced to pay higher prices for goods especially consumer imports and raw materials for cheaper production.
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| Government budget | A forecast for the next year created by the government, outlining the expected revenue from taxation eg. PAYE GST and company profits and GS for the year eg. health services, education, infrastructure
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| Productivity | a measure of output per unity of input ed labour, capital or land hat determines the speed of production and efficency of the work force
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| Inflationary expectations | what people think the inflation rate will be in the future. this can cause more inflation, as behavior can change (resulting in changes in velocity) with the expectations.
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| Means of deferred payment | function of money that enables a buyer to buy now and pay later for goods and services through credit
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| Asset Demand | the demand for money that is held for purchasing an asset
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| Transaction demand | the demand for money that occurs as a result of individuals or groups satisfying their needs and wants through purchases of goods and services.
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| Wage Spiral | A response to inflation caused by employees seeking continues wage rises to combat inflation which causes more inflation as cost push inflation occurs then increased demand for G/S as spending increases so AS then AD change continuous
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| Hyperinflation | when prices are rising every week, day or hour and can increase so much the value of purchasing power deteriorates quickly. Inflation can be at extraordinary high rats
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| Policy Target Agreement | Agreement on the level required for price stability as agreed to by the Minister of Finance and the Governor of the Reserve Bank. Maintaining inflation between 1-3% on average over the medium term
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| Price Stability | Term given to maintaining prices at relatively constant term rather than letting demand for goods push up the general price level.
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| Causes of inflation | -increase income -decreased taxes -consumers expect prices to raise -more income in the economy. Can be from -increased costs of raw materials, wages increasing, falling productivity of workers
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| Impacts of inflation | Trade can become less competitive as exports become more expensive to sell overseas and planning for the future is harder for businesses to invest. Employment drops so growth drops.
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| Winners of inflation | benefits borrowers whose assets appreciate and the value of the loan will be losing its purchasing power for the future. Rich people as the usually own property with a mortgage. People with skills in demand can request pay rises to compensate them.
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| Losers of inflation | cost of living increases for those on fixed income or incomes not adjusted for inflation easily
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| Recognisable | Characteristic of money that ensures people know what it is and it is not easily counterfeited
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| Portable | Ensures money is easily carried
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| Scarce | Ensures money is in limited supply and therefore remains valuable.
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| Full employment line | Represents the long run AS curve chowing maximum capacity of the economy it all resources are used
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| Deflationary gap | distance between the full employment line and the equilibrium of AD=AS which shows idle resources in the economy and growth potential that will have less impact on inflation
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| Inflationary gap | Distance between the full employment line and equilibrium of AD=AS which shows and economy operating beyond its full capacity in the short run and will lead to inflationary expectations rising quickly
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