Inflatipn

Question 1

What is demand pull inflation?

Answer 1

Inflation caused by excessive growth in AD when compared to supply:

High consumer spending - due to confidence or low interest rates

Excess money in the economy - too much chasing too few goods

Question 2

What is cost-push inflation?

Answer 2

Inflation caused by the rising costs of inputs to production:

A rise in wages

A rise in imported raw materials

A rise in Taxes

Question 3

Costs of inflation?

Answer 3

Cause the standard of living to fall - biggest impact on low income persons.

Countries competitiveness reduced - exports cost more, imports cost less - balance of payments deficit

Discourages saving - can lead to shortage of funds for borrowers and investors

Question 4

Is deflation good?

Answer 4

Often a sign the economy is doing badly - people may not spend and wait for further price falls. This means lower profits for firms and reduced economic growth

Question 5

What is an acceptable inflation rate?

Answer 5

2%