Inflation

Question 1

Inflation

Answer 1

A sustained increase in the cost of living or the GPL leading to a fall in the real purchasing power of money.

Question 2

Deflation

Answer 2

The sustained decrease in the general price level of goods and services, shown by a negative rate of inflation.

Question 3

Disinflation

Answer 3

A fall in the rate of inflation. (Consumer prices are still rising but at a slower rate)

Question 4

Consumer Price Index

Answer 4

A measure of the price level based on the prices of a collection of products designed to reflect the consumption basket of the average consumer.

Question 5

purchasing power

Answer 5

The buying power of a unit of currency. It is inversely related to the rate of inflation.

Question 6

What are some of the limitations of CPI as a measure of inflation?

Answer 6

1. CPI is not fully representative of all consumers
2. Doesn’t include all goods and services
3. Changing quality of goods and services
4. CPI is slow to respond to new products and services

Question 7

How does CPI (consumer price index) work?

Answer 7

• Base year is selected for prices
• Family expenditure survey is carried out on consumption habits
• A representative basket of goods is selected and weights are added to each good, dependent on the proportion of income spent.
• Weights are multiplied by PL change
• Weighted PL changes are totalled to calculate inflation rate.

Question 8

What are the causes of inflation?

Answer 8

1. Demand pull
2. Cost push
3. Growth of money supply

Question 9

Demand Pull Inflation

Answer 9

When demand > supply, businesses raise prices because consumers are willing and able to pay more money.

Question 10

Cost Push Inflation

Answer 10

When firms respond to rising costs of production by raising prices.

Question 11

Who are the potential winners of inflation?

Answer 11

1. Worker who have strong wage bargaining power.
2. Producers if PL rises faster than costs.
3. People with fixed interest loans

Question 12

Who are the potential losers of inflation?

Answer 12

1. Retired people on fixed incomes (pensions)
2. Workers with weak wage bargaining power
3. Exporting firms who become less competitive
4. Consumers, as price increases

Question 13

What is RPI and how is it calculated?

Answer 13

• Same as CPI, but includes the goods and services that were excluded from CPI. (House prices etc…)
• Calculated the same way as CPI

Question 14

What are the impacts of inflation on consumers?

Answer 14

• Falling purchasing power
• Higher priced goods and services