Price Stability

Question 1

Price Stability

Answer 1

When the general level of prices stays constant over time or grows at an acceptably low rate

Question 2

Inflation

Answer 2

A sustained rise in the general price level over time

Question 3

Cost of living

Answer 3

The price level of goods and services brought (by the average family)

Question 4

Rate of Inflation

Answer 4

The percentage rise in the general price level over time

Question 5

Real value

Answer 5

Real value takes inflation into account.

Question 6

Nominal value

Answer 6

Nominal value doesn’t take inflation into account.

Question 7

Consumer Price Index

Answer 7

Method used to calculate the rate of inflation.

‘Basket of goods’ - goods and services the average family spends on. Records the price fall every month.

Question 8

Causes of Inflation

Answer 8

• Too much demand - Total demand rises while supply rises at slower rate. Price level is pulled. Extra demand
  Demand pull inflation more likely caused by near full employment
• Rise in cost - Cost push inflation caused by higher costs of production and leads to a rise in price levels
  Causes of rise in cost :
  Higher wages - Trade unions (want workers to receive higher wages)
  Higher import prices (higher fuel costs)

Question 9

Consequences of inflation (for consumers)

Answer 9

• Loss of consumers confidence - unstable price levels
• Shoe leather costs - Consumers spend time shopping around for good prices, extra time and effort spent looking to purchase good
• Real income falls - limited income, cannot afford the same goods and services
• Consumers in debt - Debt paid more easier, easy to pay off, real value decreases
  Income redistribution problems - low paid workers with weak bargaining power may suffer a fall in their real wages

Question 10

Consequences of inflation (for producers)

Answer 10

• More flexibility - Can cut wages
  Can increase price, as consumers are less likely to notice
• Menu cost - Adjust their prices lists more often when there is inflation
• Labour market conflicts - Workers and Trade Union aware inflation reduces their purchasing power of their wages. They will demand for wage to rise to keep up with inflation so their real wage doesn’t fall.
• Unemployment - Inflation makes UK economy less competitive, lead to unemployment. Less output and need less workers
• Producers lose as creditors - Creditors (give out loans to producers), inflation causes the real value of loans to decrease.
• Producer lack business confidence - Business less likely to invest, uncertainty about the future

Question 11

Consequences of inflation (for government)

Answer 11

• Government gains as a debtor - Real value of debt decreases
• Government spend more as a provider of benefits - Pay for state pension, job seeker allowance, universal credit etc
• Government spends more as a major employer - Face demands for wage rises in time of inflation and will need to raise the finance in order to pay for these
• Government receives more in tax - collect more revenue in times of inflation as when prices and money wages rise, they will revenue higher revenue.
  The tax revenue is used to finance the extra spending on benefits and employment that inflation require.