1.2 Inflation

Question 1

Define Price Level

Answer 1

Average price of goods and services in the economy

Question 2

Define Inflation

Answer 2

A sustained general rise in the price level across an economy

Question 3

Define deflation

Answer 3

a sustained general fall in the price level across an economy

Question 4

Define disinflation

Answer 4

A fall in the rate of inflation

Question 5

Define Hyperinflation

Answer 5

Large levels of rapid and uncontrollable inflation

Question 6

How do you calculate price level?

Answer 6

1. sample goods and services chosen
2. weighing attached to items
3. Average price level calculated and turned into index form

Question 7

How is inflation calculated?

Answer 7

This years price level - last years price level

Question 8

What are the two widely used price indices in the UK?

Answer 8

1. Consumer price index
2. Retail price index

Question 9

What are the strengths of CPI

Answer 9

• items are chosen and weighted based on importance to consumers
• There is consistency in the items chosen each year, making it easier to show the cost of living.

Question 10

Limitations of the consumer price index

Answer 10

• the CPI is not fully representative of all households, ei a house with 8 kids
• the cpi doesn’t account for different kinds of spending habits
• the CPI is slow in regards to responding to new products

Question 11

How do you convert price level to CPI

Answer 11

Sure, let’s break it down:

1. Base Year: Choose a starting year to compare prices. Let’s say it’s the year 2020, and in that year, we consider the Consumer Price Index (CPI) to be 100.
2. Basket of Goods: Think of a bunch of things people regularly buy, like food, clothes, and transportation. This collection is our “basket of goods.”
3. Base Year Cost: Find out how much that basket of goods would cost in our base year, which is 2020.
4. Current Prices: Get the prices of the same basket of goods in today’s year, let’s say 2023.
5. Current Cost: Calculate how much that basket of goods would cost now.
6. Calculate CPI: Use this formula:
   [ \text{CPI} = \left( \frac{\text{Current Cost}}{\text{Base Year Cost}} \right) \times 100 ]If the result is 120, it means prices have gone up by 20% since 2020. If it’s 90, prices have gone down by 10%.

So, CPI helps us see how much prices have changed over time, giving an idea of how the cost of living is changing. If CPI goes up, things are getting more expensive; if it goes down, they’re getting cheaper.