Inflation

Question 1

Money

Answer 1

Set of assets/stock in economy ppl use regularly to buy goods/services

Question 2

Inflation

Answer 2

Increase in overall level of P

Question 3

Price level

Answer 3

Average level of P & value of money

Question 4

Inflation

Answer 4

Persistently rising PL

Question 5

Deflation

Answer 5

Persistently falling PL

Question 6

Inflation rate

Answer 6

Annual % rate of increase in the average PL

Question 7

Why is unpredictable inflation/deflation a problem?

Answer 7

Lowers RGDP and employment, redistributes wealth (to well off people)

Question 8

CPI

Answer 8

Measures the average of prices paid by consumers for “fixed” basket of goods

ONS reports it monthly and it is used to monitor changes in costs of living over time

Question 9

How do we calculate CPI inflation rate?

Answer 9

Find the cost of the CPI basket at base-period P, then at current-period P

Year n inflation rate = CPI in year (n) - CPI in year (n-1) / CPI in year (n-1) * 100

Question 10

What might make the CPI bias?

Answer 10

New goods bias

Quality change bias

Commodity substitution bias

Outlet substitution bias

Question 11

Hyperinflation

Answer 11

Very high + accelerating inflation that quickly erodes the real value of the local currency, e.g. Zimbabwe 1990s

Question 12

Are there any costs related to inflation?

Answer 12

Menu costs (adjusting price labels + price lists in menus/catalogues)

Redistributive effects (e.g. inflation takes away from pensioners and redistributes it to asset-holders (property), rises in value)

Uncertainty > lack of investment

Effect on BoP

Question 13

Demand shocks

Answer 13

Events that lead to unforeseen changes in planned AE

Question 14

Supply shocks

Answer 14

Unanticipated events that lead to firms changing their planned Q levels

Question 15

Pure inflation

Answer 15

Goods and input prices rise at the same rate

Question 16

What are the 2 main inputs whose prices can change in the SR?

Answer 16

Materials + fuels

Labour

Question 17

Interest rate (IR)

Answer 17

Price paid by a borrower of money to lender in return for the funds

Question 18

What causes hyperinflation?

Answer 18

Large amounts of govt expenditures (e.g. post-war reconstruction)

Financed by central bank printing money (directly lending to govt)

Question 19

Aggregate supply

Answer 19

Total of all the outputs of goods + services that firms wish to produce and sell over a specific time period, i.e. the economy’s GDP

Question 20

What does the Phillips curve show?

Answer 20

The level of unemployment to the rate of change of money wage rates (nominal wages)

Question 21

What happens if expected inflation < actual, vice versa?

Answer 21

Expected < actual = lower costs of hiring labour, firms hire more workers -> u < u* (unemployment rate < natural rate)

Vice versa, u > u*

Question 22

Disadvantages of the LRPC?

Answer 22

Some economists argue people are ‘backward-looking’ (use data from past to form expectations on future > adaptive expectations)

This means agents can constantly be fooled by policy maker

Question 23

What does the LRPC show and how is it illustrated?

Answer 23

Sooner or later, the economy will return to U* (natural rate), whatever the inflation rate

Vertical line, inflation on y-axis and unemployment on the x