2.1.2- Inflation

Question 1

What is inflation?

Answer 1

Inflation is the general increase of prices of goods and services.

Question 2

What is CPI?

Answer 2

Consumer Price Index is a measure of the average change overtime in the prices paid by urban customers for a market basket of consumer goods and services.

Question 3

What are some of the limitations of CPI?

Answer 3

• It doesn’t include house prices
• It isn’t totally representative, as it is impossible to account for everything sold

Question 4

What is RPI?

Answer 4

Retail Price Index is a measure of inflation which takes into account house costs such as mortgages and interest payments.

Question 5

What are some of the main causes of inflation?

Answer 5

• Demand pull
• Cost push
• Growth of Money Supply

Question 6

How does demand pull cause inflation?

Answer 6

• Demand pull inflation happens when demand for goods and services outweighs supply, which remains stable or drops.
  -This results in higher prices; inflation

Question 7

How does cost push inflation happen?

Answer 7

• Cost push inflation happens when overall prices increase due to increases in the cost of wages and raw materials.

Question 8

How does growth of money supply cause inflation?

Answer 8

• This is there is too much money in the economy.
• If people have access to money they will want to spend it but if there is no increase in the amount of goods and services supplied, then prices will have to rise.

Question 9

What are some of the effect of inflation on consumers?

Answer 9

• If people’s incomes don’t rise with inflation then they will have less to spend, which could cause a fall in living standards.
• Also inflation causes the fall in people’s real wages, which also means there could be a fall in living standards.
  -Animal Spirits- if prices are rising, they will spend less
  -Consumers who saved will lose out as their money is worth less

Question 10

What are some of the effects of inflation on firms?

Answer 10

• Due to less consumer spending, the firms will make less money.
• With inflation, this means their menu costs/ costs of production is higher.
• Some firms may also make their workforce smaller, to reduce their costs and the money lost in paying wages.
• If inflation in the UK is higher than other countries, British goods will become more expensive, meaning they will be less competitive, as it will be more difficult to export.

Question 11

What is deflation?

Answer 11

• The general decrease in the price level of goods and services

Question 12

What is disinflation?

Answer 12

• Disinflation is the reduction/ slowdown in the rate of inflation