Econs - 4.7

Question 1

inflation - definition

Answer 1

sustained rise in the general level of prices of goods & services over time, as measured by a consumer price index

Question 2

hyperinflation - definition

Answer 2

refers to very high rates of inflation that are out of control, causing average prices in the economy to rise very rapidly

Question 3

deflation - definition

Answer 3

the sustained fall in the general price level in an economy over time

Question 4

CPI - definition

Answer 4

weighted index of consumer prices in the economy overtime. it is used to measure the cost of living for an average household

Question 5

base year - definition

Answer 5

the starting of the year when calculating a price index

Question 6

CPI formula

Answer 6

(cost of basket in current year / cost of basket in base year) x 100

Question 7

causes of inflation

Answer 7

1. demand pull inflation : prices rise because d > s
2. cost push : production costs increase

Question 8

causes of deflation

Answer 8

1. demand side : demand is too low
2. supply side : cheap and more efficient

Question 9

imported inflation - definition

Answer 9

triggered by higher import prices => increased costs of production => causing domestic inflation

Question 10

demand-pull inflation

Answer 10

• triggered by higher lvls of demand in the economy => increases general price level
• increase in consumer spending
• increase in government spending
• lower interest rates
• exports rise

Question 11

cost-push inflation

Answer 11

• triggered by higher costs of production => thus forcing prices up
• higher wages => increased labour costs
• high raw material
• higher taxes
• BASICALLY imported goods cost more

Question 12

demand-side deflation

Answer 12

• high unemployment => low incomes => less spending
• higher taxes => less disposable income
• high interest rates => borrowing decreases
• fall in exports => less demand from abroad

Question 13

supply-side deflation

Answer 13

• tech improvements
• lower raw materials cost
• increased competition, better worker productivity

Question 14

consequences of inflation

Answer 14

1. menu costs - time to reprice items
2. consumers - purchasing power decreases, take time to shop for best deals
3. savers -
4. lenders
5. borrowers
6. fixed income earners
7. low income earners
8. employers
9. business confience levels

Question 15

consequences in deflation

Answer 15

1. unemployment
2. bankruptcies
3. wealth effect
4. debt effect
5. government debt
6. consumer confidence

Question 16

fiscal policy - to control inflation

Answer 16

• reduce government spending (eg. fewer public projects)
• increases taxes (eg. income tax, VAT)
• less money to spend => demand falls => less pressure on prices

Question 17

fiscal policy - to control deflation

Answer 17

• increase government spending (eg. build schools, hospitals)
• cut taxes => more disposable income
• demand rises => firms sell more => prices stabilise / rise slightly => higher output => higher growth

Question 18

monetary policy - to control inflation

Answer 18

• increase interest rates => decreased borrowing => decreased spending / increased saving => demand falls => price slowly decrease

Question 19

monetary policy - to control deflation

Answer 19

• reduce interest rates => borrowing becomes chepaer => spending & investments increase => demand rises => prices stop falling

Question 20

supply-side policy - to control inflation

Answer 20

• invest in education/training => skilled workers => higher productivity => decreased production costs
• encourages competiton => firms lower prices to attract customers
• cut cooperation tax => firms can afford to invest in technology

Question 21

supply-side policy - to control deflation

Answer 21

• improve confidence in business investment => increases supply & jobs
• lower income / corporate taxes => encourage spending & investment
• boost productivity => more goods & higher wages => higher spending