7.5c Inflation

Question 1

Inflation definition

Answer 1

The sustained rise in the level of prices

Question 2

How is inflation calculated?

Answer 2

Using Consumer Price Index

Question 3

What are the two types of inflation?

Answer 3

• Cost-push inflation

- Demand-pull inflation

Question 4

When does cost-push inflation occur?

Answer 4

When the cost of production rises so businesses put the price of its products up to cover this.

Question 5

When does demand-pull inflation occur?

Answer 5

If AD increases, but AS does not - prices go up because more demand than supply

Question 6

Opportunities for businesses from inflation:

Answer 6

• If a business borrows money and prices rise, then in real terms it is easier to pay back
• Can raise price of products if other prices are rising
• Property and stock prices may rise, increasing value of fixed assets
• If interest rates are lower than rate of inflation it will be cheaper to borrow

Question 7

Threats for business from inflation:

Answer 7

• If product is price elastic, sales may fall
• Workers will want a wage rise
• Suppliers may increase prices

Question 8

Opportunities for businesses from low inflation:

Answer 8

• Possible increase in exports

- More stable economy

Question 9

Threats for a business from low inflation

Answer 9

• If prices are not rising generally, any business that does so may lose customers to competitors
• Low inflation is close to deflation
• Lowers business confidence so may not commit to investments

Question 10

Does a fall in inflation mean a fall in prices?

Answer 10

No - it means that prices are not going up as quick as they used to

Question 11

What is a fall in prices called?

Answer 11

Deflation

Question 12

When does inflation become an issue for consumers?

Answer 12

If their wages do not rise by an equal or greater amount

Question 13

What does it mean for businesses if consumer’s wages do not rise in line with inflation?

Answer 13

Their levels of consumption will fall, which may effect a businesses ability to invest

Question 14

What is used to control inflation?

Answer 14

Interest rates

Question 15

What will a rise in interest rates result in for inflation and why?

Answer 15

A reduced level of inflation because people have to pay more back on money they have borrowed so people are less likely to borrow and there is a bigger incentive to save in the bank.

Question 16

Why does a rise in interest rates stop prices from going up?

Answer 16

It lowers demand because consumers have less disposable income

Question 17

Opportunities for a business from a fall in interest rates:

Answer 17

• Increase consumption
• Lower savings
• Increase investments

Question 18

What does a fall in interest mean for a business?

Answer 18

• Increase in demand
• Rise in profits
• Fall in costs
• Increasing investment

Question 19

Threats for a business from a fall in interest rates:

Answer 19

Increase in demand means business may consider expanding meaning more employees needed so skill shortage and rise in wage

Question 20

Threats for a business from a rise in interest rates:

Answer 20

• Lower consumption
• Higher savings
• Fall in investments

Question 21

What does a rise in interest rates mean for a business?

Answer 21

• Decrease in demand
• Fall in profits
• Rise in costs
• Decreasing investment

Question 22

What is a wage-price spiral?

Answer 22

When employees expect inflation and rising prices so demand higher wages leading to higher prices