2.1.2 Inflation

Question 1

Inflation

Answer 1

Sustained rise in the general price level of goods and services in the economy over time

Question 2

Deflation

Answer 2

Sustained fall in the general price level of goods and services in the economy over time

Question 3

Disinflation

Answer 3

The fall in inflation rates relative to the last period

Question 4

How is inflation calculated

Answer 4

Through the CPI index.

Question 5

CPI

Answer 5

Consumer price index measures the purchasing power of a household and a basket of goods is created.

Question 6

Inflation is bad if

Answer 6

Inflation is bad if wages do not rise accordingly. If consumers ask for higher wages, the firm could lay-off workers or raise prices even further. This can lead to a Cost of Living crisis.

Question 7

Deflation is bad if

Answer 7

Deflation is bad as: it can lead to people expecting lower prices in the future. Consumer confidence and demand will fall. This can also affect business confidence and leads to a fall in wages. Deflation is difficult to come out of as real interest rate values increase.