2.1.2 inflation

Question 1

define inflation

Answer 1

The rate of change in the average price level of g/s over time

Question 2

what are the 2 methods of measuring inflation

Answer 2

CPI - consumer price index

RPi - retail price index

Question 3

is cpi or rpi bank of england’s target and which is the preffered one

Answer 3

CPI is BOE target value

Question 4

what is cpi and rpi based upon

Answer 4

basket of goods and services

Question 5

what is basket of goods and services designed to do

Answer 5

represent typical purchases of consumers throughout the UK

Question 6

how many items in basket of goods and s

Answer 6

There are around 700 items in the basket of goods and services

Question 7

How are different items weighted in the basket of goods and services

Answer 7

weighted according to their relative importance in terms of how much their price changes, impact upon consumers

Question 8

why is petrol given high weighting

Answer 8

forms a large part of individuals disposable income and there are few direct substitutes

Question 9

who compile rpi and cpi

Answer 9

Office of National Statistics (ONS)

Question 10

how often does ONS update basket of goods

Answer 10

every year

Question 11

what are the limitations of CPI to measure inflation x2

Answer 11

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

Question 12

What are the 3 primary causes of inflation

Answer 12

Demand-Pull

Cost-Push

Growth of the money supply

Question 13

What is demand pull inflation caused by

Answer 13

excessive demand in the economy for goods and services

Question 14

What is the largest component of AD

Answer 14

consumption

Question 15

What are 5 causes of demand pull inflation

Answer 15

1. Reduced taxation
2. decrease in interest rates = more consumption
3. weak exchange rate = increase exports = less supply in UK = more demand
4. Improved availability of credit
5. General rise in confidence / expectations of future growth

Question 16

When does cost push inflation occur

Answer 16

firms respond to rising costs of production by increasing prices

Question 17

why do firms increase prices when responding to rising costs

Answer 17

protect profit margins

Question 18

What are 5 causes of cost push inflation

Answer 18

Higher raw material costs + higher imported raw material costs

Higher taxes

Natural disasters - disrupts supply change

Wage increases

Question 19

what does wage-price spiral mean

Answer 19

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.

Question 20

What do you shift in a AD/AS graph for cost push inflation if theres an increase in wage rates.

Answer 20

increase in wage rates = increase in costs of production

Supply decreases = SRAS SHIFT LEFT

Question 21

Whats money supply

Answer 21

The money supply is a measure of the amount or stock of money in the economy

Question 22

whats another name for money supply

Answer 22

narrow money

Question 23

what is liquidity meaning

Answer 23

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.

Question 24

what is deflation

Answer 24

Deflation is a decrease in the general price level of g/s in economy over a period of time

Question 25

if inflation goes frrom 2.7% to 2.3% what does it mean for prices

Answer 25

prices increasing at slower rate

Question 26

when does deflation occur

Answer 26

during periods of very low, or stagnant growth

Question 27

what is disinflation

Answer 27

occurs when the inflation rate is positive but falling, prices still rise but at a slower rate

Question 28

whats collective bargaining

Answer 28

union negotiating with employers to improve wage rates