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 the Consumer Price Index

Question 3

Cost-push inflation definition

Answer 3

When the cost of production rises and so the business puts the price of its products up to cover it

Question 4

Wage-price spiral definition

Answer 4

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

Question 5

Demand-pull inflation definition

Answer 5

When prices go up because demand has increase but supply has not

Question 6

Advantages to a business of inflation:

Answer 6

• If business borrows money and prices rise it becomes easier to pay back the money in real terms
• Raise prices
• Property and stock prices may also rise, increasing value of fixed assets
• If interest rates are lower than rate of inflation it will be cheaper to borrow

Question 7

Disadvantages to a business of inflation:

Answer 7

• If a product is price elastic, sales may fall
• Business may have to spend more on marketing
• Workers will want a wage rise
• Suppliers may increase prices
• Interest rates will rise

Question 8

Advantages for a business of low inflation:

Answer 8

• Low interest rates
• Possible increase in exports
• More stability in the economy

Question 9

Disadvantages for a business of low inflation:

Answer 9

• Cannot raise prices
• Low inflation is close to deflation
• Lowers business confidence so may not commit to investments

Question 10

What does a fall in inflation mean?

Answer 10

Prices are not going up as quick as they used to

Question 11

What will a rise in interest rates do to inflation levels and why?

Answer 11

It will reduce them because there will be higher repayments and more of an incentive to save in the bank

Question 12

Advantages to a business of a fall in interest rates:

Answer 12

• Increases consumption
• Lower savings
• Increased investments
• Highly geared firms would see payments fall

Question 13

Disadvantages for a business of a fall in interest rates:

Answer 13

• Lower return on savings

- Need more employees to meet demand (leads to rise in wages)