2.1.2 Inflation

Question 1

what is inflation ?

Answer 1

when the average price of goods and services is rising over a period of time

Question 2

what’s deflation ?

Answer 2

negative inflation,when average prices are falling over time

Question 3

what’s disinflation ?

Answer 3

occurs when inflation is slowing down but prices are still rising

Question 4

causes of inflation ?

Answer 4

-less output,shortage in the economy
- printing more money
- price of important goods increases

Question 5

impact of inflation ?

Answer 5

• stikes/industrial unrest,political unrest
• falling living standards
• slows economy and becomes less competitive

Question 6

how is inflation controlled ?

Answer 6

• target of 2%
• money taken from banks to decrease amount in circulation
• increasing interest rates (makes people save)

Question 7

how’s inflation measured?

Answer 7

by CPI (consumer price index)

Question 8

what’s CPI?

Answer 8

a basket of 600 goods that the govt. tracks the price of,govt. collects 120,000 separate price quotations in 141 locations

Question 9

what are the limitations of CPI?

Answer 9

• not representative of everyone
• slow to respond to new products and changes in the basket
• doesn’t monitor the change in quality of goods

Question 10

how else can inflation be measured?

Answer 10

• retail price index,older measure of inflation
• CPIH,consumer price index including housing costs

Question 11

what’s cost push inflation?

Answer 11

when the cost of production for businesses increases,rising wage costs and increasing costs of raw materials

Question 12

what’s demand pull inflation ?

Answer 12

total demand for goods exceeds total supply,as employment and resources are at full capacity businesses can’t produce anymore and often businesses increase prices if demand is high

Question 13

what’s cash flow inflation ?

Answer 13

when the supply of money in the economy increases more quickly than the economy grows,this happens when the govt. print more money

Question 14

what’s the negative impact of inflation ?

Answer 14

-internationally less competitive,sell less exports
- living standards decrease as less income to spend
- consumers spend which makes inflation worse
- interest rates increase so people have to pay more to borrow

Question 15

what’s the positive impact of inflation ?

Answer 15

• encourages spending,increases demand in the economy (as ppp is decreasing)
• makes borrowed money less to pay off,it’s worth less
• people get pay rises so more tax payed
• govt. have less debt as it’s easier to pay as moneys worth less