2.1.2 Inflation

Question 1

What is inflation?

Answer 1

is the gradual rising of prices of goods and services

Question 2

What is deflation?

Answer 2

negative rate of inflation leading to falling prices

Question 3

What is disinflation?

Answer 3

falling yet positive rate of inflation

Question 4

Explain how CPI is calculated?

Answer 4

through the basket of goods and the surveys of 6000 households

Question 5

Give 3 limitations of CPI as a measure of inflation

Answer 5

• it doesn’t pick up on short term changes in consumer spending
• it doesn’t take into account mortgage interest repayments and council tax
• it may be inaccurate as people may lie

Question 6

How often is CPI and RPI calculated?

Answer 6

Annually

Question 7

Approximately many goods and services are in the basket?

Answer 7

700

Question 8

At approximately how many locations are price data taken?

Answer 8

6000 households

Question 9

How often are weightings updated?

Answer 9

Annually

Question 10

Give an example of 1 product that has been added to the basket over the last year and 1 which has been removed

Answer 10

• Newspaper

- iPhone

Question 11

Explain the difference between CPI and RPI

Answer 11

RPI tends to be higher

Question 12

Which is higher?

Answer 12

RPI

Question 13

What is CPIH?

Answer 13

Consumer Price Index households

Question 14

Explain what is meant by ‘cost push’ inflation

Answer 14

when producers push the excess costs onto the consumers

Question 15

Give 3 possible causes of cost push inflation

Answer 15

• Increase in import costs
• increased raw material costs
• wages increase

Question 16

Explain what is meant by ‘demand pull’ inflation

Answer 16

excess demand for a good or service

Question 17

Give 3 possible causes of demand pull inflation

Answer 17

• reduced taxation
• lower interest rates
• weaker exchange rate

Question 18

Explain how growth in the money supply can cause inflation

Answer 18

there’s more money for investments

Question 19

Explain the effects of inflation on consumers/workers

Answer 19

• consumers will purchase goods and services before the prices go up
• workers will demand higher wages to cater to the price increase

Question 20

Explain the effect of inflation on firms

Answer 20

• firms will pass on their excess costs onto the consumer, which will fuel higher prices and inflation

Question 21

Explain the effect of inflation on the government

Answer 21

they will tell BoE to maintain 2% inflation rate

Question 22

Explain possible benefits of inflation

Answer 22

Reduces the real value of debt