Inflation 2.1.2 Flashcards
(20 cards)
Inflation
it is a sustained rise in the general price level. it is a weighted average spending of all households in a country. changes in the consumer price index are used to target inflation in the UK. Low inflation id deemed to be better than high inflation.
Deflation
a fall in the general PL
Disinflation
is a reduction in the rate of inflation. Prices are rising but they are rising less quicker than they were.
Give an example of Disinflation that occurred in the UK.
In 2015, falls in the oil prices in the UK brought about disinflation, as inflation fell to 0.3%
index number formula
change/original * 100
What Is CPI
Is the measure of inflation used for targeting inflation in the UK. It does not include housing costs such as mortgages, interest repayment or rent.
Limitation of CPI
- it is impossible for the figure to take into account every single good that is sold, so therefore CPI is not representative as it can only measure the average rate.
- it does not include house pricing and since that has tended to rise more than the price of other goods, the data may be lower that it should be.
What id RPI
this is a measure of inflation, in includes housing costs such as mortgages ad interest payment and council tax. RPI excludes the top 4% of income earners and ow income pensioners as they are not average households.
what are 3 cause of inflation
demand pull inflation
cost push inflation
growth of money supply
demand pull inflation
this occurs when the AD in the economy increases. Tis may be because interest rates have fallen, the level of confidence has risen, government might be be spending more or because exports are rising relative to imports.
cost push inflation
this is caused by a decrease in AS. This means that the cost of production is risings firms are willing and able to produce less as the expenses have increased.
Growth of money supply
When there is too much money in the economy. if people will have access to money they will want to spend it but if there is no increase in the amount of goods and services supplied then prices will increase.
effects of inflation on spending (Consumers)
if peoples income does not rise with inflation, then they will have less to spend which will case a fall in the living standards.
affect on debts (consumers)
those who are in debt are able to pay it off as there value will be cheaper.
affects on people who are owed money
they will loose out as the money they will get will be at a cheaper value
how will it damage the market (Firms)
Damage international competitiveness as British goods will become more expensive. so exports will become more expensive and imports will be cheaper. this will be a leakage.
effect of deflation on the (Firms)
because of deflation, this will encourage people to postpone their purchase as they will wat for the prices to go down more. pepe will save more as the value of their money will rise and they will prevent from burrowing as deflation means that the real value of their debt will increase. this will lead to a fall in demand for gods and services. this will lead to a fall in the firms profit and business confidence will go down, so less incentive.
what is the effect of Monetary Policy Committee (Firms)
high inflation rates will lead to Tight Monetary policy being established as it will decide on a rise in interest rates. this can lead to the investments of firms to fall.
effects on the income of (Workers)
if workers have fixed income, then its more damaging as it doesn’t take in real terms. this will case a fall in the living standards and workers will be wore off.
effects on the jobs (workers)
Deflation can cause some staff to lose their jobs as there is a lack of demand meaning firms can see a fall in profits s they will have to decrease their staff to cut costs.
