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MACROECONOMICS > Inflation > Flashcards

Inflation Flashcards

1
Q

What is the difference between micro and macro economics?

A

Macro focuses on the whole economy rather than individual markets.

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2
Q

Define macroeconomics

A

The study of interrelationships between economic variables at aggregate level.

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3
Q

Why has inflation been a prime focus of economic policy?

A

A stable economic environment is crucial in enabling markets to operate effectively.

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4
Q

What does unemployment show?

A

Indicates whether the economy is using its resources to the full- shows if there are FOP not being fully utilised.

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5
Q

What is an ‘open’ economy?

A

One that actively engages in international trade, the UK is an example of this. Monitored through balance of payments.

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6
Q

Where are most of the economic statistics used by economists collected and published from?

A

Various government agencies. e.g. ONS

Data on other countries published by IMF (International Money Fund), World Bank and UN.

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7
Q

What is the problem of collecting economic data?

A

Time consuming and expensive. Even ONS can’t observe absolute accuracy.

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8
Q

Define a REAL value

A

Value of an economic variable, taking into account changing prices through time (INFLATION)

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9
Q

Define a NOminal value

A

Value of an economic variable, based on current prices does NOt take account of changing prices through time

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10
Q

What is the fundamental problem of measuring economic variables?

A

Units of measurement. E.g. pound sterling changes per year. i.e. why nominal and real values have to be used.

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11
Q

How to convert nominal values to real

A

Nominal GDP/ Real GDP X 100

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12
Q

Define index number

A

Device to compare the value of a variable, in one period/ location with a base observation (e.g. RPI measures average level of prices relative to a base period).

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13
Q

When can you use index numbers?

A

To show average levels of prices at different points in time e.g. to define a typical basket of commodities that reflects the spending pattern of a representative household.

Usually a base year is 100 so if prices increase by 2.5% year 2 will be 102.5%.

Could be seen as a cost of LIVING for representative household.

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14
Q

Define CPI

A

Consumer Price Index

A measure of the general price levels in the UK, adopted as the government’s inflation target since 2003.

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15
Q

What is CPI based on?

A

Prices of a bundle of goods and services measured at different points in time.
A weighted basket based on how often they are bought.

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16
Q

How much data is collected by the ONS every month?

A

180,000 individual price quotes and 680 different products are collected each month.

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17
Q

How often are the weights updated?

A

Every year as changes in household consumption patterns need to be accomodated.

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18
Q

What is the criticism of CPI and what has been done about it?

A

It didn’t take into account housing costs of owner occupiers so CPIH was launched March 2013 to fix this.
Published alongside CPI. But otherwise calculated in the same way.

19
Q

What is the difference between CPI and inflation?

A

CPI measures level of prices in economy whereas inflation is the rate of change of prices.

20
Q

What provides one estimate of the inflation rate?

A

Percentage change in CPI

21
Q

Define inflation

A

The rate of change of the average price level e.g. percentage rate of change in CPI every year.

22
Q

Define RPI

A

Retail Price Index

A measure of the average level of prices in the UK.

23
Q

What was the headline measure of inflation until 2003?

A

RPI. Uses different basket of goods and different formulae to CPI. Includes mortgage interest payments and council tax BUT ONS discourages use.

24
Q

Define inflation

A

Sustained increase in the average price level.

25
Q

Define disinflation

A

A FALL in inflation rate. Means general price level is increasing at a slower rate.

26
Q

Deflation

A

Where there is actually a fall in the price level- negative inflation.

27
Q

Hyperinflation

A

Rapid and unchecked increase in the price level. Typically may involve inflation rates of greater than 50% or even 1000%+.

28
Q

What is the government’s macroeconomic policy objective in relation to inflation.

A

2% CPI

Low and stable to create stability in overall equilibrium levels.

29
Q

Advantages of using CPI/ RPI

A
  • large categories e.g. food and transport make it a legit indicator.
  • measurable as it is quantifiable so makes it more comparable
30
Q

Disadvantages of using CPI/ RPI

A
  • few households average
  • not fully representative, inaccurate for non typical households e.g. 14% motoring costs non applicable to those with cars
  • different spending patterns
  • quality may have increased with price
  • slow response to new products
31
Q

What is demand pull inflation?

A

Inflation caused when aggregate demand grows at an unsustainable rate.

AD shifts at curve part, increasing price level.

32
Q

What is cost push inflation?

A

Firms respond to rising costs by increasing prices.

Arises on supply side of economy.

33
Q

Name some consequences of inflation

A

Volatility and uncertainty can lead to lower levels of investment and economic growth.
Fall in value of savings for individuals.
Destabilise society and destroy confidence in economic system e.g. Germany.

34
Q

Name benefits of inflation

A

Low stable demand pull inflation may encourage firms to increase output
Psychologically workers may feel more appreciated if wages increase even though real pay doesn’t.
Firms can cut real wages, decrease costs and improve labour markets.

35
Q

What does inflation do to UK competitiveness?

A

Decreases it compared to other countries.

36
Q

How to evaluate inflation

A

The impact depends on…. rate, cause, fluctuations and comparison with other economies.

37
Q

Which type of inflation is usually more harmful?

A

Cost push

38
Q

What are the causes of deflation?

A

Fall in AD, or AS shift to right because of lower costs of production through improved technology.

39
Q

Why could deflation be damaging?

A
  1. holding back on spending
  2. lower profit margins- higher unemployment?
  3. confidence and saving- falling asset prices make people less wealthy.
  4. exports more competitive but comes at a cost i.e. higher unemployment in long term
40
Q

Define money stock

A

Quantity of money in the economy.

41
Q

Which effect does CPI and RPI fail to show?

A

Substitution effect, therefore could overstate price level in terms of cost of living. Try to overcome this by changing it annually.

42
Q

Who sets interest rates?

A

Bank of England at 2%

43
Q

How can persistent inflation arise?

A

Through persistant excessive growth in money stock. Excess cash balances mean they have more purchasing power and will impulse buy more. Saving excess also causes rate of interest to drop.

Speeding up spending decisions accelerates the whole process.

MACROECONOMICS (4 decks)

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