2 - Measures Of Performance - Inflation

Question 1

CPI inflation rate =

Answer 1

[ ( current CPI - previous CPI ) / previous CPI ] x100

Question 2

What’s the basket of goods?

Answer 2

Things a typical household buys
- updated yearly

Question 3

Price survey

Answer 3

Prices of goods in basket are monitored each month
- the price of each good is weighted according to proportion of income a typical household spends on it

Question 4

Retail price index RPI to measure inflation

Answer 4

Includes some items not in CPI
- council tax and mortgage interest payments

Question 5

Limitations of CPI

Answer 5

• only calculated for an average fam
• doesn’t consider quality of goods
• needs regular updating
• other countries may not use same method so comparisons may be inaccurate

Question 6

Costs of inflation

Answer 6

• shoe leather costs (costs of shopping around when prices change rapidly)
• menu costs
• fall in real incomes
• uncertainty
• redistributional effects (savers get lower real rate of return)
• loss of international competitiveness
• increase in inflation expectations (adds to business costs)

Question 7

Benefits of low inflation

Answer 7

• reduces real value of debt
• allows negative interest rates to
• helps labour markets work more efficiently without need to cut nominal wages as real wages can fall

Question 8

Demand pull inflation

Answer 8

Inflation caused by excess AD in economy

Question 9

Causes of demand-pull

Answer 9

• lower IR
• lower income tax
• rapid income growth
• high consumer confidence
• positive wealth effects
• easy credit
• depreciation of currency

Question 10

Cost push inflation

Answer 10

Caused by increases in costs of production in economy

Question 11

Causes of cost push

Answer 11

• rapid wage rises/ higher labour costs
• skill shortages
• increasing output costs
• higher commodity prices
• food price inflation
• indirect tax rises
• depreciation of currency

Question 12

Costs of deflation

Answer 12

• lower AD causes over supply
• businesses reduce production, increased cyclical unemployment
• rise in real value of debt
• IR may rise, reducing consumption and investment
• lower prices for pods and services reduces profits, businesses invest less etc.

Question 13

Benefits of deflation

Answer 13

• falling prices for consumers
• increase in real incomes
• Increased spending power for those on. Fixed incomes
• improved international competitiveness
• falling asset prices, houses more affordable