2.1.2 - Inflation

Question 1

What Are The 3 Types Of Inflation?

Answer 1

~ Inflation.
~ Deflation.
~ Disinflation.

Question 2

What Is Inflation?

Answer 2

The general sustained increase of the average price level of goods and services in the economy, which erodes the purchasing power of money.

Question 3

What Is Inflation Rate?

Answer 3

Is the change in the average price levels in a given time period.

Question 4

What Is Deflation?
(2 Points)

Answer 4

~ Fall of the average price level of goods and services.
~ Indicates the slowdown in the rate of growth of output in the economy.

Question 5

What Is Disinflation?

Answer 5

Occurs when the average price level is still rising, but at a lower rate than before.

Question 6

What Is The UK Target Rate Of Inflation?

Answer 6

2% per annum.

Question 7

What Are The 2 Inflation Indices Used In The UK?

Answer 7

~ Consumer price index (CPI).
~ Retail price index (RPI).

Question 8

What Is CPI?
(3 Points)

Answer 8

~ Takes into account how much is spent on each item.
~ Items are weighted.
~ Excludes housing costs.

Question 9

What Are The limitations Of CPI?
(3 Points)

Answer 9

~ Is not totally representative.
~ Does not include the price of housing.
~ Difficult to make comparisons with historic data.

Question 10

What Is RPI?
(3 Points)

Answer 10

~ Includes housing costs.
~ Takes into account that when prices rise, people switch to a product that has gone up by less.
~ Excludes the top 4% of income earners and low income pensioners.

Question 11

Which Of The 2 Inflation Indices Is Generally Lower?

Answer 11

CPI.

Question 12

When Does Cost Push Inflation Occur?

Answer 12

When the cost of production increases.

Question 13

What Does Cost Push Inflation Lead To?

Answer 13

Higher prices for goods and services.

Question 14

Which Way Does The SRAS Curve Shift During Cost Push Inflation?

Answer 14

Left.

Question 15

What Do Businesses Generally Do When They Find That Their Costs Have Risen?

Answer 15

Raise their prices to maintain their profit margins.

Question 16

What Are The Causes Of Cost Push Inflation?
(5 Points)

Answer 16

~ Increase in wages.
~ Higher prices for raw materials.
~ Higher taxes.
~ Higher import prices.
~ Natural disasters.

Question 17

When Does Demand Pull Inflation Occur?

Answer 17

When the total demand for goods and services increases to exceed the supply of goods and services.

Question 18

Which Way Does The AD Curve Shift During Demand Pull Inflation?

Answer 18

Right.

Question 19

What Are The Causes Of Demand Pull Inflation?
(7 Points)

Answer 19

~ Reduced taxation.
~ Lower interest rates.
~ Rise in consumer spending.
~ Improved availability of credit.
~ Weak exchange rate.
~ Fast growth in other countries.
~ Increase in certainty.

Question 20

What Are The Effects Of Inflation On Consumers?
(6 Points)

Answer 20

~ Less money to spend.
~ Fall in living standards.
~ Debtors can pay off debts at a cheaper value.
~ Creditors will get back less money.
~ People who saved money will get back money which is worth less than before.
~ Psychological effects on consumers, which can lead to a decrease in spending.

Question 21

What Are The Effects Of Inflation On Firms?
(4 Points)

Answer 21

~ Firms are not able to plan for the future is inflation is difficult to predict.
~ Firms might have to calculate new prices, which is costly.
~ Fall in the firms profit.
~ Fall in business confidence.

Question 22

What Are The Effects Of Inflation On Workers?
(2 Points)

Answer 22

~ Decrease in living standards.
~ Loss of jobs.