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-increase in the general level of prices measured over a period of time(a year) by RPI-X(mortg. interest, gov. policy).


increasing production costs(Rent, interest, raw materials) Supply side.

1.             Wage costs - trade unions push up w/o increases in productivity.

2.             Import prices -(oil), high with fixed Erate

3.             Exchange rates - 4% devaluation +1%.

4.             Mark-up pricing-prices more sensitive to production costs

a.        Controlling and increasing interest

b.        MTFS

c.        Reducing expectations

d.        reduce Mo

e.        Reduce lending

f.         direct intervention

1.             Statutory - govn freezes wages and prices

2.             Voluntary


Demand - pull

aggregate demand exceeds value of output at constant prices at full employment

C+I+J line above I=E-Multiplier.

1.        Availability of skilled labour(alright 10%

2.        capital utilisation(now high40%, if max power, maybe shows new efficiency)

Keynesian-demand brings about the increase in money supply

Monetarist-money supply increase which causes rise in demand

a.        reduce expenditure

b.        raise taxes

Monetary inflation

1.             low interest

2.             no lending restrictions

3.             too much money-gold find, Treasury bills

MxV=PxT (V and T const)

View-Mo and inflation related, but in 1980 inflation up, M down

If Iup-less Mo, borrowing, house prices, financial asset prices, consumption, income redistribution


1.             Bad for growth (monetarist), increases uncertainty and discourages savings and investment

2.             BoP-inflation in other countries counts, imports cheap, but effect depend on elasticities (sum big-good for BoP)

3.             Incomes distribution to profit earning, not fixed earning pensioners.

4.             Employment-controversies(Philips)

5.             Real value of savings falls

Philips curve-1962

inflation and unemployment inversely, I5.5%U0

only in SR, LR expectations-vertical. Sherman-trend other way-stagflation

natural rate assumed-1970.Pushing below>inflation.

Money illusion - people fooled with lower real wage rates, increases D, labour AS in SR normal, LR inelastic.

Earnings rise now below inflation

RPIX changes(food gains)

Inflation target easy for public to check

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