2.1.2 Inflation Flashcards
What is inflation?
The average rise in the price level in an economy
What is deflation
The average fall in the price level in an economy
What is disinflation?
Where the rate of inflation falls
What is the consumer price index?
A measure of the general price level in the U.K.
How is the consumer price index calculated?
- a total of 180,000 goods and services are recorded ranging 700 types of product
- the items are weighted base on the popularity of the item
- the CPI measures the price of these goods and services, then bases the price level rate
What are the limitations of using the CPI?
- inflation is not experienced by the same people
- people have different spending patterns
- doesn’t take into account the changing quality of goods
Differences between the RPI and the CPI?
The RPI excludes goods that the highest incomes houses can afford, the CPI does not
What is demand pull inflation?
Where demand outstrips the level of supply
What is cost push inflation?
Where supply outstrips demand
What is the effect of inflation on consumers?
A rise in prices means consumers can no longer afford items leading to aa lower standard of living
What is the effect of inflation on firms?
A rise in prices means raw materials and goods costs more leading to a loss of revenue
What is the effect of inflation on the government?
A rise in prices means the government would automatically get more tax revenue without the need to raise taxes
Explain one limitation of using the CPI to measure the rate of inflation?
The CPI is not fully representative as it is only a figure for the ‘average’ household
What is most likely to cause an increase in credit card lending?
-a fall in interest rates
Explain one possible link between an increase in credit card lending and then rate of inflatin?
A rise in AD causes an increase in inflation, increasing credit card lending
How does a change in the exchange rate affect inflation?
Weak currency, imports more expensive, leading to cost-push inflation
Two economic effects of a higher inflation rate?
- a fall in real wages
- an increase in inequality
Why is it important to regularly update the CPI index?
- to ensure it is an accurate representation of inflation
- to ensure consumption trends are reflected clearly
How does a high level of inflation lead to the fiscal drag effect?
Workers will seek to find better wages to keep up with the rate of inflation. This leads to greater tax revenue and more invest,MDR into NHS and such sectors. Shifts LRAS to the right because NHS creates a healthier workforce, increase productivity.
How does high levels of inflation lead to a fall in business confidence?
High and volatile prices leads to an uncertainty for future prices. This decreases investment. Lead to a negative multiplier and can lead to unemployment.
How does high levels of inflation reduce the real burden of debt?
As inflation rises, so should wages (to keep up) this means for those who have a fixed debt, it would be easier to repay.
How does deflation lead to a reduction in interest rates?
BoE is likely to cut interest rates to encourage investment and spending. Increases both consumption and investment.
How does deflation lead to an improved current account position?
Deflation means U.K. goods and services are cheaper. Increase U.Ks. competitive advantage over other countries. Exports are an injection into circular flow of income
How does deflation leas to higher unemployment?
As deflation can be caused by a fall in AD. Can lead to cyclical unemployment
