2.1.2 Inflation

Question 1

What is the definition of inflation

Answer 1

A sustained increase in the general price level.

Question 2

What is the definition of deflation

Answer 2

A sustained decrease in the general price level which leads to a fall in real purchasing power of money

Question 3

What is the UK’s inflation target set at?

Answer 3

2%

Question 4

What is the CPI

Answer 4

-Consumer price index which is the main measure of inflation used by the UK and EU.

Question 5

How does the CPI work

Answer 5

1.Base year selected

2.Family expenditure survey is carried out to track what people are buying month to month

3.Representative basket of 700 goods and services is formed and weights are attached to them which are based on the % of income it takes.

Question 6

What is the formula to calculate an index number

Answer 6

Raw number/Base year raw number x 100

Question 7

How do you calculate CPI?

Answer 7

1-Sum of the price index of year x Weighting

2-Divide this number by 1000

3-This gives the price index for the year

4-Percantage change between either base year or previous year.

Question 8

What are some limitations of using the CPI as a measure of inflation?

Answer 8

1-The CPI is not representative of all consumers. EG, many ‘typical’ households will spend a large proportion of income on motoring costs which means this does not accurately target households which only use public transport.

2-Different households have different spending patterns such as single people compared to households which have children

3-Doesn’t account for regional differences in the cost of living.

4-Inaccuricies in data eg. sampling errors.

Question 9

What is Demand-Pull inflation

Answer 9

Is when the demand for total goods and services in an economy outstrips supply therefore putting pressure on FOP’s and making aggregate supply inelastic. This causes FOPs to become more scare and increase in price, firms respond to this via higher selling prices in attempts to cover increasing costs.

Question 10

What are some causes for demand pull inflation?

Answer 10

1- Lower interest rates rates

2- Weak exchange rates

3-Lower income and coporation tax

4-Goverment spending increases

Question 11

What is cost push inflation

Answer 11

Cost push inflation occurs when the costs of production for firms increase therefore making causes a shift LEFT in supply. Increased costs consequently means consumers must inherit higher prices set by firms in attempts to be able to pay these costs.

Question 12

What are causes of cost push inflation

Answer 12

• Increased raw material prices
• Increase wages
• Higher commodity prices
• Indirect tax rises
• Skill shortages