Inflation

Question 1

What is the inflation 1 definition? (not economic one)

Answer 1

General increase in the average price level from one year to the next

Question 2

What is the economic inflation definition?

Answer 2

Fall in the value of money

Question 3

What is an index?

Answer 3

A system that measures changes in a set of variables that change by different amounts in different directions. Shows average movement

Question 4

What are the 3 types of index?

Answer 4

• consumer price index = price changes
• FTSE 100 = share prices
• sterling trade weighted index = exchange rates

Question 5

What is demand pull inflation?

Answer 5

Occurs when there is an excess aggregate demand - positive output gap.

Question 6

What are the main causes of demand pull inflation?

Answer 6

• Depreciation in the exchange rate
• reduction in direct and indirect taxation
• rapid growth of the money supply as a consequence of increased bank & building society borrowing
• rising cc and increase in rate of growth of house prices
• Faster rates of economic growth in other countries

Question 7

What is excess demand?

Answer 7

Too much money chasing too few goods

Question 8

What is cost push inflation?

Answer 8

Occurs when costs of production are increasing

Question 9

What are the causes of cost push inflation?

Answer 9

• external shocks
• depreciation in exchange rate
• Acceleration in wages

Question 10

What leads to an inward shift in the SRAS curve?

Answer 10

• firms raise prices to product their profit margins
• wages often follow prices
• A rise in inflation can leach to rising inflationary expectations

Question 11

What are 2 evaluative statements for AD rising?

Answer 11

• Depends on the size of exchange rate depreciation
• depends on the PED for imports
• Uk jobs will be created
• may not matter if Uk is below inflation target

Question 12

What is productivity?

Answer 12

The rate of output per worker per day
It measures the efficiency of factors of production in the production process

Question 13

What does higher productivity do?

Answer 13

• Produce goods and services at a lower cost per unit
• Increase total output from our scarce factor resources
• helps to bring about economic growth for a country in the long term

Question 14

What factors explain the productivity gap?

Answer 14

• Relatively low rates of capital investment
• low rates of spending and research and development
• not investing enough in skills of labour force