Macro: INFLATION Flashcards
(19 cards)
What is inflation?
Persistent or sustained increases in the average price level over a period of time.
The UK government’s target for inflation is 2.0% (+/- 1%) CPI.
What is deflation?
A persistent or sustained decrease in the average price level.
In a period of deflation, the CPI/RPI would be a negative figure.
What is disinflation?
A fall in the rate of inflation where the average price level is still rising but at a slower rate than before.
In a period of disinflation, the CPI/RPI would still be positive.
How is the Consumer Price Index (CPI) calculated?
- Deciding on a representative ‘basket’ of about 700 goods and services.
- Undertaking a monthly ‘price survey’ of these goods.
- Calculating an average price using a geometric mean.
- Calculating a weighted average price based on the ONS Living Costs and Food Survey.
The basket is updated once a year.
What is the formula for calculating the CPI?
(Price x Weight)/sum of the weights.
Example: 10408/100=104.1.
What are some limitations of the CPI in measuring inflation?
- The basket of goods becomes dated over time.
- Each item has a fixed weight ignoring the substitution effect.
- The changing quality of goods and services can affect prices.
- Different households have different spending patterns.
For example, CDs were replaced with music downloads in the basket.
What is the Retail Price Index (RPI)?
An alternative measure of inflation calculated similarly to the CPI but with key differences.
RPI includes housing costs, while CPI excludes them.
What are the differences between CPI and RPI?
- CPI excludes housing costs; RPI includes them.
- CPI includes stockbroker’s fees and university accommodation fees; RPI does not.
- CPI uses a geometric mean; RPI uses an arithmetic mean.
- RPI has a smaller population survey than CPI.
What is CPIH?
A new measure of annual UK consumer price inflation that includes owner occupiers’ housing costs.
Owner-occupied housing costs do not include utility bills or minor repairs.
What is demand pull inflation?
Demand pull inflation occurs when excessive growth in aggregate demand outstrips the economy’s ability to produce goods and services.
What happens to the aggregate demand in demand pull inflation?
The aggregate demand shifts right without a corresponding shift in aggregate supply.
What is the result of demand pull inflation on price levels?
It leads to a higher price level.
True or False: Demand pull inflation occurs when aggregate supply increases while aggregate demand remains constant.
False
Fill in the blank: Demand pull inflation occurs when __________ growth in aggregate demand outstrips the economy’s ability to produce.
[excessive]
In the context of demand pull inflation, what does AD represent?
AD represents aggregate demand.
What is the effect of an increase in aggregate demand on the price level during demand pull inflation?
The price level increases.
What does SRAS stand for in the context of inflation?
SRAS stands for short-run aggregate supply.
What does the shift of AD to the right indicate in an economic context?
It indicates an increase in aggregate demand.
Put demand pull inflation onto a digram.
