2.1.2 - Inflation Flashcards
What Are The 3 Types Of ‘Flations’?
~ Inflation.
~ Deflation.
~ Disinflation.
Describe ‘Inflation’
The persistent increase of prices in an economy in a year, which erodes the purchasing power of money.
Describe ‘Deflation’
(2 Points)
~ Persistent fall in prices in an economy in a year.
~ Occurs when the inflation rate is negative.
Describe ‘Disinflation’
When the average price level is still rising, but at a slower rate than before.
How Can Inflation Be Measured In A Country?
(2 Points)
~ Using the consumer price index (CPI).
~ From the index, they can calculate annual rates of inflation.
Describe How Consumer Price Index (CPI) Is Calculated
(5 Points)
1) Family expenditure survey will be carried out to determine what goes into the basket, issued by the ONS.
2) ‘Consumer basket’ of most popular goods and services is formed, with average prices attached.
3) Prices are weighted based on the % of income they take from households.
4) Weighted prices are added to give the total weighted price of the basket.
5) Baskets are updated yearly.
What Are The Limitations Of Using CPI?
(4 Points)
~ Personal inflation rates differ, not everyone will be buying all the goods and services in the basket.
~ Certain goods are exposed to significant price fluctuations, distorting overall inflation rate.
~ Doesn’t include housing costs.
~ Basket updates are too slow, consumption habitats may be rising faster.
Describe The Retail Price Index (RPI)
(3 Points)
~ Calculated the same way as CPI.
~ RPI includes housing costs within the basket.
~ RPI is usually higher than the CPI, due to its sensitivity to interest rate changes affecting mortgage interest.
What Are The Causes Of Inflation?
(3 Points)
~ Demand pull inflation.
~ Cost push inflation.
~ Growth of the money supply.
Describe Demand Pull Inflation
(2 Points)
~ AD shifts right, leads to greater pressure on existing FOPs.
~ Economic growth but higher prices.
What Causes Demand Pull Inflation?
(3 Points)
~ When AD shifts right, there is greater pressure on existing FOPs to produce more output.
~ More pressure on scarce FOPs, increases the price of the FOPs.
~ Increasing costs of production for firms.
Describe Cost Push Inflation
(2 Points)
~ SRAS shifts left.
~ Due to higher costs of production for firms.
What Causes Cost Push Inflation?
(2 Points)
~ Higher costs of production.
~ Higher costs passed onto consumers in form of higher prices.
Describe Growth Of The Money Supply
(2 Points)
~ Governments increase the money supply, through quantitive easing.
~ Means people spend more, increasing inflation.
What Are The Costs Of High Inflation Rates?
(4 Points)
~ Lower purchasing power.
~ Erosion of savings, due to lower interest rates.
~ Lower export competitiveness.
~ Menu costs.
What Are The Benefits Of Low Inflation Rates?
(4 Points)
~ Workers have higher wages.
~ Firms are encourage to increase output.
~ Reduces the real value of debt.
~ Improvement of government finances.
