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Flashcards in Inflation and deflation Deck (42)
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1
Q

inflation d

A

a sustained increase in the general price level

2
Q

deflation d

A

a fall in the general price level

3
Q

CPI ( consumer price index) d

A

the headline measure of inflation, derived from movements in a weighted basket of consumer goods over a 12-month period

4
Q

family expenditure survey d

A

a representative monthly survey of UK household expenditure used to derive changes in the consumer price index

5
Q

what is the most popular measure of inflation in the UK

A

CPI

6
Q

what is the government’s target for CPI inflation

A

2.0 % (+ / - 1 %)

7
Q

difference between CPI and RPI

A

CPI excludes a number of categories, notably housing costs

8
Q

how are the goods that are measured in the CPI chosen

A

using information from the family expenditure survey

9
Q

are all types of item weighted evenly in the CPI

A

no, the spending is divided into categories and weighted according to its importance

10
Q

what are the limitations of the CPI

A

different population groups experience different rates of inflation
CPI doesn’t include house prices
may be over-estimation because does not take into account quality improvements

11
Q

what are the two traditional ways of categorising the causes of inflation

A

demand-pull

cost-push

12
Q

cost-push inflation d

A

inflation caused by economy-wide increases in production costs

13
Q

indirect taxes d

A

taxes levied on spending on goods and services

14
Q

how do you show cost-pull inflation on a diagram

A

shift to the left of AS

15
Q

wage-price spiral d

A

process whereby increases in costs, such as wages, lead to increases in prices

16
Q

what are the sources of cost-push inflation

A

rise in cost of imported raw materials
rising labour costs
higher indirect taxes
wage-price spirals

17
Q

demand-pull inflation d

A

inflation resulting from too much demand in the economy, relative to supply capacity

18
Q

when is demand-pull inflation most likely to occur

A

when there is little spare capacity in the economy

19
Q

when does aggregate demand increase

A

when one or more of its components increases

20
Q

quantity theory of money d

A

the theory that increases in the money supply will lead to increases in the price level

21
Q

money supply d

A

the total amount of money in circulation or in existence in a country

22
Q

Fisher equation d

A
the mathematical identity MV = PY (or MV = PT)
M is money supply
V is velocity of circulation of money
P is the general price level
T is transactions in a year
Y is real value of national output
23
Q

velocity of circulation d

A

the number of times the money supply changes hands in a year

24
Q

hyperinflation d

A

very large, rapid increases in the general price level

25
Q

what is the notable thing about the Fisher equation

A

T and Y tend to increase slowly so are assumed to be constant
V and T (Y) are constant so money supply and price level are directly related

26
Q

what does hyperinflation indicate

A

an economy which is out of control

27
Q

talk about international competitiveness and inflation

A

if UK inflation is higher than competitors then UK goods and services will become less price competitive

28
Q

talk about the effect on investment of inflation

A

inflation creates uncertainty about future costs, revenues and profitability so investment levels fall

29
Q

talk about unanticipated inflation

A

leads to uncertainty and undermines investment

30
Q

anticipated inflation d

A

where economic agents correctly predict the future rate of inflation

31
Q

unanticipated inflation d

A

where economic agents do not accurately predict the future rate of inflation

32
Q

talk about inflation and the effect on distribution of income

A

inflation creates winners and losers, winners will be borrowers of money, losers will be savers with fixed returns

33
Q

talk about inflation and worsening industrial relations

A

strikes can be widespread during periods of inflation as workers feel they are losing out and push for higher pay

34
Q

fiscal drag d

A

increases in the burden of taxation when tax allowances are not increased in line with inflation

35
Q

explain fiscal drag

A

when people pay a higher percentage of their income in tax when there is inflation

36
Q

what is a way to reduce fiscal drag

A

increasing the tax-free allowance in line with inflation

37
Q

what value defines hyper inflation

A

inflation in excess of 1000% per year

38
Q

money illusion d

A

when economic agents fail to realise that changes in money values are not the same as changes in real values

39
Q

why can inflation be good

A

workers see rise in pay packets and firms see revenues increasing, could be money illusion but is preferable to no price increases

40
Q

benign deflation d

A

falling prices resulting from technological advances across the economy

41
Q

malevolent deflation d

A

falling prices resulting from a significant downturn in economic activity

42
Q

what are the 2 types of deflation

A

benign and malevolent