inflation

Question 1

inflation

Answer 1

the sustained rise in average price of goods and services over a period of time

Question 2

retail price index (RPI)

Answer 2

-two surveys
-living costs (around 6000 households), and food survey used to find out what people spend their money on and the proportion of income spent on items
-second survey measures a change in price of around 700 G/S commonly used

Question 3

consumer price index (CPI)

Answer 3

-mortgage interest payments and council tax excluded
- a larger sample of population used
-CPI tends to be lower than RPI
-calculated in a similar way to RPI

Question 4

CPI/ RPI limitations

Answer 4

-RPI excludes top 4% of incomes
-CPI excludes mortgage payments of council tax
-information from survey could be inaccurate
-might miss short-term changes in spending habits

Question 5

hyperinflation

Answer 5

when prices rise extremely quick and money rapidly looses its value

Question 6

disinflation

Answer 6

a slowing down in rate of inflation
e.g. from 3% to 2%

Question 7

demand pull inflation

Answer 7

a rising price level caused by an increase in aggregate demand

aggregate demand increases due to a greater pressure on existing factors of production to produce more output closer to Yfe

Question 8

causes of demand pull inflation

Answer 8

-lower interest rates
-lower income/corporation tax
-increased consumer confidence
-increased gov spending
-weak exchange rate

Question 9

cost push inflation

Answer 9

a rising price level caused by an increase in the costs of production, SRAS shifts left

Question 10

cuases of cost push inflation

Answer 10

-increase in raw material prices
-increase in wages
-increase in business taxes
-increase in price of imported raw material due to a weaker exchange rate

Question 11

costs of inflation

Answer 11

-lower purchasing power
-erosion of savings (shoe leather costs)
-lower export competitiveness
-wage/consumer price spirals
-fiscal drag
-inflationary noise

Question 12

lower purchasing power

Answer 12

assuming wages are not rising in line with inflation then housholds are worse off as it affects their ability to buy G/S affecting their living standards

Question 13

erosion of savings

Answer 13

assuming interest rates are not rising in line with inflation, the return on savings is less than inflation so savings is losing its value, especially bad for umeployed and pensioners

Question 14

erosion of svaings - shoe leather costs

Answer 14

high inflation erodes real value of savings so a lot of people will spend time looking for other banks with higher interest rates, but there is time and effort involved and an opportunity cost

Question 15

lower export competativeness

Answer 15

if inflation in a country is high relative to other countries that countries exports will be less internationally competitive reducing demand for exports, reducing revenue

Question 16

wage price spirals

Answer 16

as inflation is high and workers anticipate it, they are going to bargain for higher wages to keep up with costs of living
workers ask for inflation equalling pay rise
if workers give this it increases costs of production, passing the costs of production onto consumers (higher prices), increasing inflation leading to a spiral

Question 17

consumer price spiral

Answer 17

high inflation means rational consumers anticipate and bring forward their spending increasing consuming and aggregate demand increasing demand pull inflation leading to a spiral

Question 18

menu costs

Answer 18

if inflation is high and rising, firms have to continually print new menus/ new price catalogs
this is costly so it gets passed on through higher prices

Question 19

fiscal drag

Answer 19

when inflation is rising and workers are receiving higher incomes (in line with inflation), they are not better off, but they get dragged into higher tax brackets so they are worse off

Question 20

inflationary noise

Answer 20

when the inflation is volatile, the price signalling function of market forces loses its value
people are confused and put off their consumption, businesses put off their investment which holds back economic growth

Question 21

benefits of inflation

Answer 21

-workers with higher wages (boosts morale)
-consumption is natural - low and stable inflation (no putting off, foward consumption)
-firms encouraged to increase output
-can keep unemployment low in a recession
-reduces real value of debt
-improvements in government finances

Question 22

unemployment low in a recession

Answer 22

firms want to keep there skilled workers but in a recession its common to sac workers
if there is some inflation, firms will find ways to avoid sacking workers

Question 23

reduces real value of debt

Answer 23

workers can bargain for higher wage, firms might be able to make more profit with high inflation so wages, revenues all increase making it easier to service debt

Question 24

improvements to government finances

Answer 24

fiscal drag
greater VAT amounts due to higher prices

Question 25

evaluation points for inflation

Answer 25

-rate of inflation -anticipated vs unanticipated -cause -stability -duration

Question 26

deflation

Answer 26

a continuing tendancy for the average price level to fall

Question 27

demand side deflation

Answer 27

maligant deflation bad Ad demand decreases comes with lower economic growth long-term and anticipated

Question 28

supply side deflation

Answer 28

good begign deflation costs of production decreases higher economic growth short-term and unanticipated

Question 29

anticipated eflation

Answer 29

-BAD - deflation spiral -delayed spending - know its going to be cheaper - consumption decreases, AD decreases, firm revenue decreaes, so they lower price = deflation spiral -positive real interest rates - incentive to save -increases real value of debt - decrease prices and firm profits and incomes, less able to service debt

Question 30

short-term deflation

Answer 30

falling prices for consumers -falling input prices for firms