Inflation

Question 1

What is the government target of inflation?

Answer 1

2% +-1%

Question 2

How is inflation measured?

Answer 2

CPI and RPI

Question 3

Who sets the targets?

Answer 3

Government determined goal, set by the MPC- Monetary Policy Commitee

Question 4

What is CPI?

Answer 4

a weighted price index which measures the monthly change in the price of goods and services.

Question 5

What are index numbers?

Answer 5

a ratio that compares the value of a variable with some base point.

Question 6

Expenditure and Food Survey

Answer 6

Information from 7,000 households. Proportion of income spent on each item is used to ascertain weighting.

Question 7

Price Survey

Answer 7

undertaken by civil servants collecting changes in prices of 650 of most commonly used goods and services in retail outlets.

Question 8

Why is it necessary to update CPI?

Answer 8

• ensure inflation is accurately measured. (as it is used in pricing)
• to predict changing tastes and fashions of consumers
• take into account development o new products due to technological advances

Question 9

Indexation

Answer 9

adjusting the value of economic variables in line with inflation

Question 10

Problems of measuring inflation

Answer 10

• CPI does not include housing costs. RPI does.
• This is a major part of household spending.
• CPI measures the cost of living for only an ‘average household’. Top and bottom 4% are not included.
• Sampling problems, only 57% of household actually respond to survey.

Question 11

What is Cost-push inflation?

Answer 11

when the price level increases due to a sustained rise in the costs of production

Question 12

How does Cost-push inflation occur?

Answer 12

• Increase in raw material cost
• Low exchange rate
• Fall in productivity (output per worker)
• Increase in indirect taxes
• weather

Question 13

What is demand pull inflation?

Answer 13

when the price level increases due to increases in AD rising faster than AS.

Question 14

How does demand pull inflation occur?

Answer 14

• Consumer confidence (consumption as a whole)
• Government spending
• Net-Exports

Question 15

Disadvantages of inflation rising

Answer 15

• Fall in the value of money
• Fall in international competitiveness
• Redistribution of costs

Question 16

Benefits of falling inflation

Answer 16

• Greater UK competitiveness, increasing demand for exports, reducing the current account
• Improved confidence by investors
• Increase in real incomes

Question 17

Deflation

Answer 17

a sustained decrease in the price level

Question 18

Costs of deflation

Answer 18

• Falling consumer confidence, AD falls, fall in output.

- Consumers delay purchases

Question 19

Relationship between Inflation and Unemployment

Answer 19

Inverse relationship