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If the rate of inflation or price level increases that means money can buy fewer goods and also the value of assets such as houses fall. If house prices fall it tends to cause lower spending therefore less consumption and more saving because  consumers see a fall in their main asset so there is a negative wealth effect. All of this therefore would decrease AD. Also falling house prices would mean that some people were unable to pay off their mortgages causing the baqnks to lose money. These bank losses lead to lower lending and lower investment, which was a big part of the credit crunch in 2008, which further decreases AD and in the AS in the long run.

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High Inflation would lead to UK exports becoming less competitive, this is due to the fact that the goods would be cheaper in countries where there is lower inflation. a decrease in Exports means Aggregate demand would also fall, this would then lead to a fall in output by firms which then decreases the amount of labour needed. As there is less labour needed unemployment would rise, this means more Government spending would have to be on welfare, however at the moment the Government is making cuts in welfare spending so this would be problematic.

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High inflation may lead to exports becoming less competitive. This happens due to it being cheaper to buy elsewhere, which leads to a fall in aggregate demand. This may then lead to increased unemployment, as businesses may get rid of workers as they are producing too much and have an excess supply. As unemployment increases, there may be more pressure for the government to increase spending on welfare.

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A rise in the level of inflation, may lead to a firms confidence to decrease, this is due to the fact that they aren't able to predict the level of demand for their good or service in the future  and therefore may be uncertain whether there level of profits will out weighthe  businesses costs. This could lead to firms investing less perhaps leading to an increase in unemployment and in turn a reduction in the labour force. The unemployment could mean that consumer confidence is reduced so therefore they would spend more rather then saving (also won't wt much return on their savings due to inflation

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An increase in inflation can cause uncertainty for firms because they’re unsure if the business will manage to maintain a high profit margin to make up for costs. Businesses, because of this are unsure about the future of the business and its growth. Therefore, businesses will invest less because of this uncertainty, which means there is a risk of less training on the workforce, which can reduce productivity and therefore the quality of the good, which can make your product less competitive.

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The term of inflation is the general rise in price level. A constant increase in inflation can cause a significant decrease in individuals real wage, therefore causing a demand for an increase in a “pay rise” nearing the rate of inflation. This causes an effect on firms via the cost of production would increase causing inflation to rise further, causing a recreation of the cycle also known as the wage cycle. However If firms can not provide the pay rise this could lead to demotivation of workers causing the economy to not produce efficiently and not supply accordingly to an economies PPC casuing a mis allocation of resources.

THIS IS NOT COPIED AND PASTED!

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If the increase in inflation is faster than the increase in disposable income then it will lead to a decrease in purchasing power, therefore there is a fall in real wages. Therefore there will be a fall in disposable income which will result in a fall in consumer confidence as they will be less optimistic about their economic prospects, and so this will lead to reduced consumption as consumer spending will decrease due to the fall in consumer confidence which leads to a fall in AD (curve shifts to the left)

Also, the fall in consumer spending may reduce profits for businesses, and so there could be a fall in business confidence in their ability to make a profit, and this could then lead to a fall in investment, and this may result in firms not being able to produce the same output as before and so it may mean they could have an inefficient surplus of labour. This may lead to a rise in unemployment, and so a further fall in confidence and consumption in bars and restaurants for example which may result in more unemployment. This is a negative multiplier effect.

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Inflation refers to a sustained increase in the general price level in an economy. Inflation can create, both, business and consumer uncertainty in an economy. In turn, this will affect the long-term project or spending commitments or even force a number of companies and consumers into bankruptcy. Thus, a significant amount of workers will be made redundant and this will contribute to an increase in cyclical unemployment, creating an inefficient economy and increasing the negative output gap. A sudden increase in cost-push inflation will decrease the level of investment made by firms because as the costs of production increase the short-run aggregate supply will shift inwards and the prices will increase but the demand for their goods or/and services will decrease and as a result the amount of profit they make will decrease. This will have a negative effect on the less affluent part of the population because they will simply not have enough income to purchase goods that are essential for them to survive e.g. food. This will contribute to an increase in the number of food banks in an economy and an increase in government spending on welfare benefits to support them.  Also, when inflation rises faster than incomes the real wages of consumers will decrease and therefore their purchasing power will be reduced. Consequently, consumers’ demand and consumption of goods and services will decrease because they will no longer be able to afford them. However, if the consumers’ income increases by a higher percentage than inflation, their purchasing power will remain constant or may even be higher than before and therefore their consumption will not be affected.

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An increase in inflation would ultimately lead to an increase in the prices for goods and services. This would lead to a decrease in the amount demanded for said goods, this means firms would reduce their output to keep efficiency and resources to be allocated correctly, this would lead to an increase in unemployment therefore peoples real household incomes would also decrease alongside tax revenues which lead to a greater budget deficit. This means households would increase saving and reduce their consumption, it is also inequality of income as lower earning families still have to buy necessities as they have inelastic demand but don't have the full means to be able to afford it .

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If demand pull inflation rises at a higher rate than income then people real wages will be lower. Meaning people have less disposable income. This will lead to a decrease in demand for goods and services and will lead to a decrease in aggregate demand. Due to this business output will decrease and unemployment will increase. There'll be less tax revenues and more welfare payments which could lead to a greater budget deficit.

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High inflation may lead to higher interest rates for businesses and people needing loans and mortgages as financial markets protect themselves against rising prices and increase the cost of borrowing on short and longer-term debt. There is also pressure on the government to increase the value of the state pension and unemployment benefits and other welfare payments as the cost of living climbs higher.

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Exports become less price competitive when the level of inflation increases.
This is because as the price of exports increases in the UK, aggregate demand for exports will fall.
This leads to a decrease in the firms profit which then causes a fall in the amount of jobs needed (unemployment rises).
Overall this leads to a negative multiplier effect and negative accelerator effect.

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If inflation increases, then there would be an increase in the firms production costs because of the higher prices of, for example, raw materials and therefore this would decrease the workers/ consumers real wage (taking inflation into account). This would then lead to lower disposable income and so there will be lower consumption on goods and services (this shows a decrease in purchasing power) and higher savings as consumers are uncertain about the future. However if inflation increases, then the value of the increase in savings by the consumers, would have fallen if the prices are increasing at a faster rate than savings.

Furthermore in turn, this may cause a ‘wage spiral’ where if inflation increased then there would be higher demand for higher wages which then increases the business costs and so increase the rate of inflation again, which then increases demand for higher wages, and so on.

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An increase in inflation would cause a decrease in peoples real wage. This would result in workers asking for a wage increase in line with inflation. However if businesses increased their workers wages this would increase their production costs and due to cost-push inflation the general price level would rise, worsening inflation and the cycle starts again. This is known as the 'Wage Spiral'.
But if the firms are unable to give this wage increase people would have less disposable income and less consumer confidence and consumption would fall. This fall in consumption would lead to a decrease in AD, shifting AD the left and causing the general price level to fall. This could lead to deflation and higher levels of unemployment. To counter this the government could decrease inflation rates to increase borrowing therefore increasing consumption and AD.

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an increase in inflation for a prolonged period of time would cause a countries exports to become less price competitive. As a result, exports would decrease due to goods and services being more expensive compared to other countries. This causes a decrease in profits for firms hence causing an increase in unemployment. This causes a negative multiplier and accelerator effect on national income. Moreover, this will worsen a country's trade balance due to imports increasing and exports decreasing.

Also, due to an increase in unemployment the government would receive less money through income tax. in addition, consumers will have less disposable income thus causing a decrease in consumption hence resulting in a decrease in AD.

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Business uncertainty is one example of a problem with inflation.
If inflation is high then that will cause the confidence of that business to fall because they are unsure on both prices and costs. This will then cause the capital investment spending of the business to decrease , because of this the investment into the economy would decrease and therefore will cause aggregate demand to decrease because of the fall in investment  which is a component of AD.

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An increase in inflation means that there will be more demand for wage increases by at least the same rate as inflation. This increases the cost of production and so businesses will reduce output which further drives up inflation and back again to demand for further wage increases. This is known as the "wage spiral". The demand for wage increases can be controlled by the Government in the public sector however, it  lead to more trade union strikes eg. The junior doctors strike.

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Big narstieg

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The wage spiral is when inflation rises and therefore due to a larger percentage of employed peoples income being spent, they demand more wages. This leads to a higher level of inflation and the spiral begins

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Government imposing higher indirect tax on necessities or addictive goods is an example of cost-push inflation. Higher tax would increase the costs of production which would decrease supply and shift the SRAS to the left. To maintain their profits, businesses would increase their prices and therefore increasing the rate of inflation. As inflation erodes the purchasing value of money, this would increase income equality as families with lower income will be spending a higher % of their earnings on these goods.

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An increase in inflation can cause an increase in the cost of borrowing. High inflation leads to higher interest rates for businesses and people. Financial markets do this to protetct themselves against rising prices and increase the cost of borrowing on short and longer term debt. An increase in interest rates will make it more expensive to borrow, this could lead to a decrease in business investment and this will cause a reduction in aggregate demand.

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A country's competitiveness will be reduced by inflation as exports will become more expensive. Therefore AD will decrease as the demand for UK exports will reduce. This will in turn lead to businesses profits decreasing and so they will be employing fewer workers which adds to the problem of unemployment. The recent a announcement  by George Osborne revealed that further spending cuts are to be put in place so this decreases government spending and if exports are decreasing too then this will reduce AD. Whereas if the level of inflation was reduced,the exports would be cheaper and more would be demanded.This could compensate for the decrease in government spending.

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Inflation is the sustained increase in the general price level of goods and services in an economy. One problem of inflation could be business uncertainty.

Hight inflation would lead the business confidence to decrease,this is because they cannot be sure of what their costs and prices are likely to be. This would lead to a lower level of capital investment spending of the businesses. This will cause the level of investment in the economy to decrease which will cause a negative economic growth. Negative economic growth can cause  many problems like unemployement and an increase of the budget defecit because the goverment would have to spend more money on benefits for the unemployed.

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An increase in inflation would increase the inequality gap. This happens because an increase in the general price level(inflation) for products such as food and energy would have a large effect on those with low incomes. This is because the majority spending for low income households is on these necessities whereas it's only a small percentage of spendings for higher income households. This means that those with low incomes will be effected by inflation much more than the high income households meaning inequality increases. Because of this, people will have less disposable income meaning they will consume less and therefore there will be a decrease in AD.

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An increase in inflation causes the standard of living to decrease for those on fixed or near fixed income and will effect those on low income and welfare benefits the most. This is because the price of goods and services increase so there will be a decrease in disposeable income. Due to commodities being inelastic the household will buy them regardless. Therefore the household will decrease consumption causing a decrease in aggregate demand, as consumption makes up 65% in the UK. Also, there will be a increase in savings as households are less confident due to the decrease in disposbale income.

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High inflation may lead to higher interest rates for businesses and people needing loans and mortgages as financial markets protect themselves against rising prices and increase the cost of borrowing on short and longer-term debt. There is also pressure on the government to increase the value of the state pension and unemployment benefits and other welfare payments as the cost of living climbs higher.

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Due to an increase in inflation, the price of neccessity items such as food, drink, electricity and gas would also increase. Due to their inelastic demand, people need the goods and services to survive so they will pay the price regardless. Therefore, those households on low incomes spend a higher percentage of their income on neccessities. The households on higher incomes can still afford all they would like so they don't become affected by this. Therefore, the households on lower incomes have less disposable income so they consume less which results in them saving more. As saving is a leakage, there is a decrease in AD. Therefore, there is a decrease in business confidence as they do not want to risk losing profits so businesses invest less. All of this results in a slow down in economics growth which in time, after two quaters of the year, will result in a recession.

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An increase in the level of inflation would decrease consumer confidence. Due to this employees would demand a pay rise to be able to support their family as goods increase price. Therefore business costs will increase. However after the pay rises increase, if inflation increase by more than the pay rise then will will mean that employees are still in the same position. For example if inflation is 1% and rises to 4% and employees pay rise increases to 2%, then this will mean that employees are still going to demand a pay rise and this cycle will continue. This is known as the WAGE SPIRAL.

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An increase in the general price level could cause real incomes to decrease if wages increase less than the rate of increase in inflation (e.g. if inflation rose by 5% but wages only rose by 2%, there would be a 3% decrease in real wages). Consumers would have less purchasing power, decreasing their confidence and therefore, reducing consumption. This may result in greater social inequalities; as the prices of goods/ services increase, they become progressively inaccessible to those on lower incomes, particularly in the case of essentials like food or utilities. Higher income earners would not be affected much by what would seem to them as a small increase in prices. Although, lower income earners spend most of their income on food and utility bills, so they would be forced to consume less or even switch to lower quality food that is cheaper, and certainly reduce their spending on luxury goods/ services. This may result in an increase in health problems, meaning that more would have to be spent by the government on welfare, increasing the budget deficit.

A fall in the demand for goods/ services as a result of this decreased consumption may cause businesses to be uncertain about their future in terms of prices and costs, as the revenue they receive would no longer be predictable. A decrease in business confidence may see a decrease in investments in capital/ human capital. A decrease in investment would decrease Aggregate Demand, slowing economic growth, or even resulting in negative economic growth. However, if the rate of inflation isn’t surprisingly high, business confidence is unlikely to be affected much, especially in the case of larger firms as they have the resources to cope with inflationary pressures.

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An increase in the level of inflation could cause income inequality to arise. For example if inflation would cause the price of food to increase then people from low income households will be affected. This is because their wages may not be enough to pay for the food that has had a raise in price. However if people on high income saw this they would not have an issue with the change in food prices. Therefore this would show income inequality between the people on low income and the people on high income. However in the UK right now inflation is at 0.3% therefore the likelihood of this to currently happen does not seem that likely.

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An increase in the level of inflation

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An increase in the rate of inflation could see exports become less price competitive and decrease. This is because there would be a rise in the price of the good or service and other countries demand would decrease. As a result, firms will see a decrease in profits leading to fewer jobs and an increase in unemployment. This cause a fall in economic growth and may even cause a negative output gap.

In addition, the government would receive less money from taxation, such as VAT and corporation tax. Taxation funds a large percentage of government spending and so government spending would also decrease. This effects thos on low-income the most widening inequality.Consumption would also fall due to an increase in price therefore the purchasing power of consumers would decrease leading to an increase in savings. All these factors decrease AD and will shift AD to the left.

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An increase in the level of inflation can lead to higher costs when businesses and people need to borrow money due to the higher interest rates. This is because the financial markets protect themselves against the general rise in prices of goods and services and therefore increase the cost of borrowing. This increase in the cost of borrowing could lead to a decrease in investment as firms will find it much harder when borrowing money, and this will lead to a lower aggregate demand, which may have a negative impact on the economic growth of the country.

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An increase in the level of inflation can cause a decrease in the level of investments made my firms and businesses.
This is due to levels of confidence because if inflation is high, Businesses would be less confident and therefore may be uncertain about the future as there may not be enough demand for their products. Therefore the level of investment in the economy will decrease, as investment is a component of Aggregate Demand, This will also decrease causing negative economic growth.

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Inflationary pressures can cause significant issues within an economy and this is largely due to the idea of expectations and confidence. One example of a critical problem caused by inflation and its effect on confidence is the “Wage Spiral” effect. If wages increase less than the increase in inflation, the value of workers’ real income is likely to fall.

This could have an effect in one of two ways: On one hand, in jobs with more negotiable wages, there may be a higher demand for a wage rise to ensure that real income is not negatively affected by the rise in inflation. This will act as Cost- Push inflation as businesses may see higher production costs and so will raise prices in order to cover the cost, leading to a further increase in the price level. As this continues, the effect continues to take place forcing prices higher and higher.

However on the other hand, workers with a low ability to negotiate wages may simply see a fall in their real income followed by a fall in the amount of disposable income and so will see a decrease in consumption. This will have an adverse effect on not only aggregate demand but also on the standard of living of those on these lower incomes. In the long term, this will see an increase in income and wealth inequality.  The United States experienced the Wage spiral effect during the 1970s which was caused by increasing pressure from Trade Union Groups.

Inflation --> Fall in consumer confidence --> Increasing demand for higher wages--> Higher cost of production i.e. Shift to the left of SRAS--> Further Inflation (Spiral).

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One problem with inflation is that it causes something that is called the Wage Spiral. This is when an increase in inflation means people will have to buy goods and services for a higher price than usual, which in turn means an increase in the demand for a higher Wage. This causes an increase in the cost of production, therefore there will be a shift in the SRAS curve to the left. This is cost-push inflation, which would mean prices rise even more and the demand for higher wages increases, which is why this is called a spiral. Furthermore, the Wage Spiral causes a shift to the right in the Aggregate Demand curve as higher wages, means greater disposable income, more confidence and finally an increase in consumption. This is demand pull inflation as greater demand means an increase in price level. However this depends on the percentage increase of incomes, compared to the percentage increase in inflation because if incomes increase at a slower rate than inflation there could be decrease in Aggregate Demand which means inflation will slow down.

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One major problem with inflation is that it increases the cost of borrowing. The high inflation will have already impacted both consumers and firms confidence and so making borrowing harder due to the increased debt amount, will make their confidence decrease even further. The increase in inflation will therefore cause an inward shift in AD as consumers will have a higher savings ratio and so spend less and also firms will save rather than spend. One major component of AD is capital investment and so if firms are not able to borrow money, it will impact the AD curve and also the LRAS curve. This is as the firms productive potential will be lower due to the fact that the capital investment could have perhaps increased the firms spare capacity.

A rise in the cost of borrowing also impacts the government. For example, they may have to give out welfare payments which will increase the budget deficit. Also the increase in the cost of borrowing may force certain suppliers/producers out of the market and this may therefore require the need for government subsidies. If the decrease in AS then decreases up to a certain extent to where there is excess demand, it will cause the cost of living to increase even further.

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Ceterus paribus, if there is an increase in the rate of inflation, the values of consumers’ real wages decreases. Thus, their purchasing power is also reduced. One consequence of this is that consumers may insist upon an increase in wages so that in real terms their pay remains the same, or even rises, to compensate for the increased costs of living. With these extra wages, consumers have more disposable income and there is an increase in consumption, which shifts the aggregate demand curve to the right, increasing the rate of inflation. Furthermore, the costs of labour for businesses are increased due to the increase in wage rates and they therefore increase the prices of their goods and services to protect their profit margins. Short run aggregate supply decreases, shown as a left shift on a SRAS diagram, and the rate of inflation increases further. Clearly, this will stimulate consumers to demand an additional wage increase and the cycle continues.

Though, if labour productivity rises at an increasing rate, the wage spiral is weakened as workers produce more goods and services. The profit margins of a firm are therefore achieved and protected and the real wages of consumers increase.

Anisha Johal

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Inflation is the sustained increase in the general price level of good and services in an economy.
A problem of inflaion could be the the increase in inequality between the rich and the poor.

As the prices of goods and services rise they become more and more inaccessible to those on lower incomes especially when it comes to goods like food which is a necessity. Those on high income do not need to look for alternatives as they will not be affected by a little increase in price. However people on lower incomes spend most of their income on food and when the price of this food increases they have to consume less or buy smartpriced,lower quality food. This could lead to increase in health problems and a lower quality of life. This increases inequality as the people on lower income suffer a lot more than people on higher incomes.

An increase in the use of food banks could help out those who have lower incomes.

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That "Sh" post was me. Dont know how to get rid of it lol

An increase in the rate of inflation could be due to a depreciation in exchange rates therefore leading to an increase in price for imports. This would be an example of cost push as it leads to the cost of production for firms to increase. This increase causes a decrease in the SRAS leading to a shift to the left, leading to a higher rate of inflation.

A problem that can be caused by inflation is the decrease in Real Wages. This is seen if the percentage increase in wages is lower than the rate of inflation resulting in people being less well off than before. For example, the increase in wage rate could be 2% whereas the inflation rate could be 5%. This could lead to less purchasing power, and therefore less consumption. As a consequence there could be a decrease in AD. As well as the shift in SRAS causing a slower rate of economic growth, the decrease in AD would decrease the rate more.

The decrease in consumption would mean less profits for firms. Less corporation tax. Less tax revenue for the government. Not helping budget deficit. More austerity, which targets those on low income more.

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An Increase in the rate of Inflation could occur With the government introducing the national living wage; labour costs will increase for businesses. This will shift sras to the left and prices of their goods will increase so that the business maintain their profit margins. This is an example of cost push inflation.

A problem caused by inflation is that it can cause businesses to be uncertain about the future in terms of prices and costs,that they will not be sure about how much revenue they will receive. This would reduce business confident,and businesses will be less confident to invest in capital or improvements in human capital. A in reduction investment will decrease aggregate demand as investment is a component of AD and the productive potential of the economy could also decrease. This could potentially decrease long run economic growth.

However this problem will depend on how many businesses are uncertain about the future,if it is only a few retailers for example it will not damage the economy and also the productive potential might not decrease even with little investment as other supply side policies could outweigh the reduction in investment and increase the productive potential.