consequences/causes of inflation

Question 1

inflation

Answer 1

a rise in prices which can be translated into a decline of purchasing power over time

Question 2

Purchasing power

Answer 2

the amount of goods and services that a currency can buy.

it measures the real value of money in terms of what it can actually purchase in the market

Question 3

Inflation is measured using …

Answer 3

Consumer Price Index

Question 4

what happens when

When inflation rises…

Answer 4

the general price level of goods and services also rises, therefore decreasing purchasing power.

Question 5

reduced purchasing power =

Answer 5

means that people can buy fewer goods and services with the same amount of money.

Question 6

what happens if there is

A fall in real incomes =

Answer 6

If incomes rise at a slower rate than inflation then people have lower material living standards. Those on fixed or low incomes suffer the most and poverty may increase

Question 7

Shoe leather costs=

Answer 7

thetime it takes for households and firms to searchfor cheaper prices. This is an opportunity cost

Question 8

what does… cause

Confusion and uncertainty=

Answer 8

If prices are constantly increasing, price signals become distorted and it creates uncertainty in the economy.
Planned investment and spending may fall

Question 9

inflation can cause

Reduced international competitiveness =

Answer 9

If relative inflation rates are higher than other countries, our exports appear more expensive. It may worsen a current account deficit as a result (If a country is sending more money out than is coming in)

Question 10

what happens

If inflation is anticipated…

Answer 10

it can cause inflation as households/firms
spend now to avoid higher prices down the line. Anticipated inflation may also encourage workers to negotiate higher wages which will cause cost-push inflation where there is an increase in AS

Question 11

what happens

If inflation is unanticipated…

Answer 11

it may discourage spending as households/firms lose trust in the value of money and the value of their investments

Question 12

Interest Rate Adjustments:

Answer 12

Central banks often respond to inflation by adjusting interest rates. Inflationary pressures may lead to higher interest rates, which can impact borrowing costs and investment decisions.

Question 13

what happens if

if wages are not increaseing in line with inflation…

Answer 13

it reduces the ability to purchase goods and services,

lowering material living standards, especially for those on the lowest incomes in society.