THE ECONOMIC ENVIRONMENT - INFLATION

Question 1

What is inflation

Answer 1

Inflation is a sustained rise in average prices measured by CPI (consumer prices index) in other words, inflation is a measure of average price levels across an economy.

Question 2

What does the bank of england aim to keep inflation at

Answer 2

The bank of england has a target to keep inflation at 2% - they do give them a little bit of leeway of 1% over or 1% under

2% is believed to create macroeconomic stability as it allows for some price rises to occur, but is stable enough to make planning easier for businesses and households.

Question 3

What are the causes of inflation

Answer 3

Demand - pull inflation occurs when aggregate supply is unable to keep up with increases in aggregate demand

Cost - push inflation occurs when there is an increase in the cost of production (wages, raw materials, and taxes)

Inflation expectations

Question 4

What are the pros of low inflation (around 2%)

Answer 4

encourages people to spend money before prices increase, keping the economy moving

Buisnesses can reduce their wage bill by raising money wages by less than inflation. This may stop forms making workers redundant to cut costs

Price stabliity increases the ablilty of individiuals and organisations to plan their finances

Eroder value of debt over time (paying back a loan of £100,000 will be worth less in real terms in 5 years time)