Inflation

Question 1

What does inflation mean?

Answer 1

Is the sustained increase in the general price level

Question 2

What does disinflation mean?

Answer 2

decrease in the rate of inflation

Question 3

What does deflation mean?

Answer 3

Deflation occurs when the inflation rate falls below 0%

Question 4

What does hyperinflation mean?

Answer 4

hyperinflation is very high and typically accelerating inflation

Question 5

How is Inflation measured?

Answer 5

The Consumer Price Index (CPI)

Question 6

what are index numbers relating to inflation?

Answer 6

An index number is a unit-free number derived from the price level over a number of years that makes computing inflation rates easier. Inflation is the general and ongoing rise in the level of prices in an economy.

Question 7

What are the 2 causes of inflation?

Answer 7

• Cost-push inflation

- Demand-Pull inflation

Question 8

Demand-pull inflation?

Answer 8

Inflation may occur from the excessive growth in AD in the economy

Question 9

Cost-push inflation?

Answer 9

Inflation may be caused by an increase in the costs of producing goods and services in the economy

Question 10

Demand-pull factors?

Answer 10

• High consumer spending
• Too much money circulating within the economy
• Increased demand for exports
• Government spending

Question 11

Cost-push factors?

Answer 11

• Wage levels increase

- Rise in the cost of imported raw materials

Question 12

A negative consequence of inflation on savings?

Answer 12

Inflation reduces the value of savings, especially if the savings are in the form of cash or bank account with a very low-interest rate. Interest rates and inflation generally have an inverse relationship

Question 13

A consequence of deflation on debt?

Answer 13

Deflation increases the real value of money and the real value of debt. Deflation makes it more difficult for debtors to pay off their debts. Therefore, this leaves less money for spending and investment.

Question 14

Causes of deflation?

Answer 14

decrease in demand or growth in supply

Question 15

An advantage of using an index for inflation?

Answer 15

An important advantage of the Consumer Price Index is that it helps to measure the rate of inflation and cost of living in a country

Question 16

A disadvantage of using an index for inflation?

Answer 16

A major drawback of using CPI to measure inflation is that it fails to account for product quality, new products, product substitutions and individual buying habits

Question 17

Relationship between interest rates and inflation?

Answer 17

when interest rates are low, the economy grows, and inflation increases. Conversely, when interest rates are high, the economy slows and inflation decreases.
Inverse relationship

Question 18

what are weights?

Answer 18

The weights are meant to reflect the relative importance of the goods and services as measured by their shares in the total consumption of households.

Question 19

How do you calculate the index number?

Answer 19

(Raw number/ Base year Raw number)x100

Question 20

How to calculate weighted price index?

Answer 20

1) Covert prices into Index form
2) Multiply Index numbers by weight
3) Add up all weighted prices
4) Divide by total number of weights

Question 21

A negative consequence of inflation on uncertainty?

Answer 21

Uncertainty for both firms and consumers. If firms cannot confidently predict the rate of change of prices, the increase in uncertainty may be damaging, lead to reluctancy with investment, hindering economic growth

Question 22

A negative consequence of inflation on negotiation of wages? LRAS?

Answer 22

High inflation may lead to workers negotating for higher wages to compensate for the increase in prices

This further increases the costs faced by firms, which may reinforce the inflationary process

Shifting LRAS left

Question 23

Consequences of inflation depend on?

Answer 23

Whether the cause was cost-push or demand-pull.

Cost-push is often quite bad as it can lead to a reduction in growth

Demand-pull is healthy to a certain extent often lead to growth

Question 24

Positive consequence of inflation relating to stable consumption?

Answer 24

Inventivises consumers to buy now. No point in holding back. Incentivises healthy consumption habits which is fluid for the economy, sustained increase in growth, production

Low and targeted and stable inflation is a good thing. No erratic consumption changes

Shifts AD right