2:1:2 - Inflation - Measures Od Economic Performance

Question 1

Define Inflation.

Answer 1

Is sustained rise in the general price level.

Question 2

How is the General Price Level calculated?

Answer 2

Using an index such as the Consumer Price Index (CPI)

Question 3

What is the reason for using Consumer Price Index (CPI) to calculate the general price level?

Answer 3

The reason for using an index is that percentage changes can be showing easily, making effective comparisons possible.

Question 4

Define Deflation.

Answer 4

Is a fall in the general price level, negative inflation.

Question 5

Why is Deflation a problem?

Answer 5

• Stops any firms wanting to invest in a country from abroad as the value of output is likely to fall relative to the initial costs and deflation is likely to cause aggregate demand to fall.

Question 6

What is Disinflation?

Answer 6

Occurs when prices rise more slowly than they have done in the past.

Question 7

What is Disinflation a sign of?

Answer 7

Inflation is coming under control.

Question 8

Why could Disinflation be concerning?

Answer 8

Can mean investment and confidence are low in the economy, and deflation might occur.

Question 9

How many surveys are conducted to calculate inflation?

Answer 9

2

Question 10

What are the two surveys that help calculate inflation called?

Answer 10

• Price Survey

- Living Costs and Food Survey (LCF)

Question 11

Which survey that calculates inflation, surveys the information about what people buy?

Answer 11

Living Costs and Food Survey (LCF)

Question 12

How does the LCF survey work?

Answer 12

• Carried out by ONS
• Collecting information from a sample of 7,000 households
• Using self-reported diaries of all purchases.

Question 13

What does the LCF actually look at?

Answer 13

Used to determine the contents of a virtual ‘basket’ of goods and services that households spend their money on.

Question 14

How is the price survey conducted?

Answer 14

Once a month measuring changes in the price of the 650 most commonly used goods and services.

Question 15

In the survey of prices why are price changes multiplied by the weights?

Answer 15

To give a Price Index

Question 16

From the price index how do you measure inflation?

Answer 16

By calculating the percentage change in this index over consecutive years

Question 17

What is the UK governments inflation targets?

Answer 17

2% (±1%)

Question 18

What may happen if prices begin to rise by less than 1%?

Answer 18

Risk of deflation and even a recession might arise

Question 19

Problems with the CPI measure of inflation.

Answer 19

• Does not include housing costs
• CPI measures the cost of living for an average household doesn’t include top and bottom 4%
• Sampling problems, 57% respond to the survey, and when they do they might not gather accurate information
• The list of items surveyed changes every year but in that time tastes and fashions can change
• Doesn’t reflective those who have atypical spending patterns (eg, vegans, non cat drivers)
• Does not understand price changes with quality

Question 20

Why is Housing costs another problem with the CPI measure of inflation?

Answer 20

Monthly mortgage payments other form a large part of a households spending.

Question 21

What alternative measure can we use to calculate inflation rather than CPI?

Answer 21

Retail Price Index (RPI)

Question 22

What does Retail Price Index measure?

Answer 22

Is an index used to measure inflation that includes housing cost such as mortgage and interest payments.

Question 23

What are the disadvantages of using Retail Price Index (RPI) to calculate inflation?

Answer 23

• Not useful for internal comparisons

- Measurements are affect by inflations affects on Mortgage Interest Payments

Question 24

If inflation is falling does that mean Consumer Price Index is falling?

Answer 24

No if inflation is still positive but falling CPI is still rising but at a slower rate

Question 25

In terms of AD/AS analysis inflation can be shown as?

Answer 25

A shift to the RIGHT in AD or a shift to the LEFT in AS

Question 26

What is a shift to the RIGHT in AD called?

Answer 26

Demand-Pull Inflation

Question 27

When does Demand-Pull inflation occur?

Answer 27

Occurs whenever AD shifts to the right, usually made worse by Multiplier effects.

Question 28

What is a shift to the LEFT in AS is known as?

Answer 28

Cost-Push Inflation

Question 29

When does Cost-Push Inflation occur?

Answer 29

Whenever cost of production increase in an economy.

Question 30

Why might Costs of production increase?

Answer 30

• Fall in exchange rate making imports more expensive

- Higher co operation tax

Question 31

What do monetarists believe causes inflation?

Answer 31

Money supply

Question 32

How can inflation be controlled?

Answer 32

Can be controlled by controlling the money supply, perhaps through the rate of interest.

Question 33

What are the effects of inflation on Consumers?

Answer 33

• The real value of savings falls as prices rise
• The purchasing power of those on fixed income falls as prices rise
• Those with high levels of personal debt benefit from inflation, also the real value of debt falls.

Question 34

What are the effects of inflation on firms?

Answer 34

• Loss or international Competitiveness - exports become expensive and imports cheap, balance of payments worsens
• Increased Uncertainty - if firms thinks that costs are rising and increasing interest rates they may curb investment
• Investment from abroad might decrease - Inflation erodes the value of money, so foreign firms will not buy into a currency that is falling in value.
• Increased prices might be a sign that firms can make profits - encourages investment
• People will accept wage rises below the rate of inflation but will never accept wage cuts

Question 35

What are the effects of inflation on the Government?

Answer 35

• Redistribution of Income - Those in Fixed incomes will find their incomes fall on real terms.
• Inflation reduces the real interest rate, so the cost of borrowing falls - because your money is worth more
• A little inflation provides a cushion against the perils of deflation - when prices are falling, the economy can run into a vicious circle of underinvestment and reduced spending.

Question 36

What are the effects of inflation on Workers?

Answer 36

• Inflation might mean that some workers expect high wages but firms do not feel confident about paying higher costs - especially true if firms cannot pass on the higher costs as higher prices
• Trade-off between wage inflation and unemployment (the short-run Phillips curve) - if there is high wage inflation, it is easier for people to find work because firms are raising wages only because they commit choose other workers at lower wages.