2.1.2 inflation Flashcards
define inflation
The rate of change in the average price level of g/s over time
what are the 2 methods of measuring inflation
CPI - consumer price index
RPi - retail price index
is cpi or rpi bank of england’s target and which is the preffered one
CPI is BOE target value
what is cpi and rpi based upon
basket of goods and services
what is basket of goods and services designed to do
represent typical purchases of consumers throughout the UK
how many items in basket of goods and s
There are around 700 items in the basket of goods and services
How are different items weighted in the basket of goods and services
weighted according to their relative importance in terms of how much their price changes, impact upon consumers
why is petrol given high weighting
forms a large part of individuals disposable income and there are few direct substitutes
who compile rpi and cpi
Office of National Statistics (ONS)
how often does ONS update basket of goods
every year
what are the limitations of CPI to measure inflation x2
excludes mortgage payments and their associated interest and for many households, mortage is the biggest item of expenditure monthly.
The CPI does not recognise improvements in the quality of goods and services over time
What are the 3 primary causes of inflation
Demand-Pull
Cost-Push
Growth of the money supply
What is demand pull inflation caused by
excessive demand in the economy for goods and services
What is the largest component of AD
consumption
What are 5 causes of demand pull inflation
- Reduced taxation
- decrease in interest rates = more consumption
- weak exchange rate = increase exports = less supply in UK = more demand
- Improved availability of credit
- General rise in confidence / expectations of future growth
When does cost push inflation occur
firms respond to rising costs of production by increasing prices
why do firms increase prices when responding to rising costs
protect profit margins
What are 5 causes of cost push inflation
Higher raw material costs + higher imported raw material costs
Higher taxes
Natural disasters - disrupts supply change
Wage increases
what does wage-price spiral mean
when workers demand higher wages to maintain their real incomes.
When firms pay more wages, they pass this cost onto consumers
As workers are consumers, they demand more rise in pay resulting in a wage price spiral.
What do you shift in a AD/AS graph for cost push inflation if theres an increase in wage rates.
increase in wage rates = increase in costs of production
Supply decreases = SRAS SHIFT LEFT
Whats money supply
The money supply is a measure of the amount or stock of money in the economy
whats another name for money supply
narrow money
what is liquidity meaning
Liquidity is how easy it is and quickly it takes to turn financial assets into money. Notes and coins are very liquid, a house illiquid.
what is deflation
Deflation is a decrease in the general price level of g/s in economy over a period of time
