2.1.2 Inflation

Question 1

what is inflation?

Answer 1

a sustaned increase in the general price level

Question 2

how is the rate of inflation measured?

Answer 2

• price level data is converted into consumer price index
  index= current (price level) / base number (price level)
• from this you can easily clauclate intrest rates change using the percentage change formula

Question 3

calculating inflation rate

Answer 3

Question 4

what is disinfaltion?

Answer 4

• infaltion rate is still incraesing (positive)
• BUT the rate is less than last year
• inflation rate is falling

the price level continues to rise but by a smaller percentage

Question 5

what is deflation?

Answer 5

• where the inflation rate is negative
• price levels are actually going down

Question 6

what are the three stages in calculating the UK’s price level?

Answer 6

1. the ONS conducts it’s living costs and Food survey. This involves interviewing 7000 households to find 650 most common goods and services
2. the ONS conducts a price survey where they collect the prices of these 650 goods from across the UK in order to find an average price level
3. a weighted average of all the prices is calculated to find the price level

Question 7

what are the problems with CPI as a measure of standard of living?

Answer 7

• unusual spending habits
• changes in quality
• lag time
• doesn’y include mortages

Question 8

why are unusual spending habits a problem with CPI?

Answer 8

• the 650 basket of goods “most common goods and services” are only accounted for by the average consumer, not weirdos
• buying uncommon goods and services whicch may not be accounted for

Question 9

why is time lag a problem with CPI?

Answer 9

• CPI basket is only updated every year
• therefore will not acknowlege price changes in new goods and services
• however consumer cost of living is imapcted almost immediatly

Question 10

why are changes in quality a problem with CPI?

Answer 10

prices could be increaseing duento an increase in quality rather than inflation

Question 11

what is the working age population?

Answer 11

people between 16 and 64 yeas

Question 12

what is the difference between the inactive and active population?

aka economically inactive/active

Answer 12

inactive: are not able to work, are not activley seeking work (inheritance, uni students, disabled)
active: are able to work, are activly seeking for work, cureently working (workforce)

Question 13

what is the difference between RPI and CPI?

Answer 13

• RPI includes mortgage repayments (unlike CPI)

Question 14

what are the two types of inflation?

Answer 14

• demand pull
• cost push

Question 15

What is demand pull inflation?

Answer 15

When AD increases, causing the price level to rise

Question 16

what is cost push inflation?

Answer 16

when the costs of production increase –> SRAS shifts to the left

only occurs with SRAS (costs of production)

Question 17

what is hyper inflation?

Answer 17

when inflation reaches above 50% per month

Question 18

what is a deflationary spiral?

Answer 18

1. deflation occurs first, price levels decrease
2. consumers delay their purchases and instead save- in hope for prices to drop even lower
3. lack of consu,ption causes AD to shift to the left
4. after repeated cycles of this, real GPD decreases and unemplyment increases

Question 19

what are the causes of deflation?

Answer 19

1. increase in AS
2. decrease in AD

sustained decrease in general price level

Question 20

how do inflation and deflation affect the value of money?

Answer 20

• inflation: decraeses the value of money (can buy less goods with £1)
• deflation: increases the value of the money (can buy more goods with £1)

Question 21

how do you calculate inflation rate?

Answer 21

(new- original/original) 100

Question 22

what are the 3 stages to calculating the UKs price level?

Answer 22

1. Office of national statstics interviews 7000 households to find the 650 most common goods and services
2. price survey is conducted to find the average price level
3. a weighted price level of all the prices is calculated in order to find the price level

Question 23

how do you calculate weighted average?

Answer 23

average price × % of total spending

Question 24

what is the formula for consumer price index?

Answer 24

Question 25

what is a price wage spiral?

Answer 25

1. due to inflation prices rise
2. cost of living rises
3. workers demand higher wages
4. increasing cost of production for firms–>SRAS shifts to the left
5. increase in price level

eventually can lead to hyperinflation

Question 26

what are the benefits of inflation?

Answer 26

• no risk of deflationary spiral
• reduces the real value of debt—> improves inequality (better for the poor)

Question 27

what are the cons of inflation?

Answer 27

• risk of price wage spiral —> hyperinflation
• reduces the real value of savings

Question 28

define inflation

Answer 28

an increase in the general price level of goods/services with an economy resulting in a decrease in the purchasing power of money

Question 29

define deflation

Answer 29

a decrease in the general price level of goods/services within an economy resulting in an increase in the purchasing power of money

Question 30

define disinflation

Answer 30

a decrease in the rate of inflation (the general price level is increasing, but at a slower rate than before)

Question 31

define consumer price index

Answer 31

the official measure used to calculate inflation , using a weighted basket of goods

Question 32

define demand pull inflatiom

Answer 32

inflation caused by an increase in AD

Question 33

define cost push inflation

Answer 33

inflation caused by an decrease in AS