2.1.2 Inflation

Question 1

What is inflation?

Answer 1

The average rise in the price level in an economy

Question 2

What is deflation

Answer 2

The average fall in the price level in an economy

Question 3

What is disinflation?

Answer 3

Where the rate of inflation falls

Question 4

What is the consumer price index?

Answer 4

A measure of the general price level in the U.K.

Question 5

How is the consumer price index calculated?

Answer 5

• 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

Question 6

What are the limitations of using the CPI?

Answer 6

• inflation is not experienced by the same people
• people have different spending patterns
• doesn’t take into account the changing quality of goods

Question 7

Differences between the RPI and the CPI?

Answer 7

The RPI excludes goods that the highest incomes houses can afford, the CPI does not

Question 8

What is demand pull inflation?

Answer 8

Where demand outstrips the level of supply

Question 9

What is cost push inflation?

Answer 9

Where supply outstrips demand

Question 10

What is the effect of inflation on consumers?

Answer 10

A rise in prices means consumers can no longer afford items leading to aa lower standard of living

Question 11

What is the effect of inflation on firms?

Answer 11

A rise in prices means raw materials and goods costs more leading to a loss of revenue

Question 12

What is the effect of inflation on the government?

Answer 12

A rise in prices means the government would automatically get more tax revenue without the need to raise taxes

Question 13

Explain one limitation of using the CPI to measure the rate of inflation?

Answer 13

The CPI is not fully representative as it is only a figure for the ‘average’ household

Question 14

What is most likely to cause an increase in credit card lending?

Answer 14

-a fall in interest rates

Question 15

Explain one possible link between an increase in credit card lending and then rate of inflatin?

Answer 15

A rise in AD causes an increase in inflation, increasing credit card lending

Question 16

How does a change in the exchange rate affect inflation?

Answer 16

Weak currency, imports more expensive, leading to cost-push inflation

Question 17

Two economic effects of a higher inflation rate?

Answer 17

• a fall in real wages

- an increase in inequality

Question 18

Why is it important to regularly update the CPI index?

Answer 18

• to ensure it is an accurate representation of inflation

- to ensure consumption trends are reflected clearly

Question 19

How does a high level of inflation lead to the fiscal drag effect?

Answer 19

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.

Question 20

How does high levels of inflation lead to a fall in business confidence?

Answer 20

High and volatile prices leads to an uncertainty for future prices. This decreases investment. Lead to a negative multiplier and can lead to unemployment.

Question 21

How does high levels of inflation reduce the real burden of debt?

Answer 21

As inflation rises, so should wages (to keep up) this means for those who have a fixed debt, it would be easier to repay.

Question 22

How does deflation lead to a reduction in interest rates?

Answer 22

BoE is likely to cut interest rates to encourage investment and spending. Increases both consumption and investment.

Question 23

How does deflation lead to an improved current account position?

Answer 23

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

Question 24

How does deflation leas to higher unemployment?

Answer 24

As deflation can be caused by a fall in AD. Can lead to cyclical unemployment