2.4 Inflation

Question 1

What is the policy objective of low and stable inflation

Answer 1

Low and stable inflation encourages economic stability, increases consumer confidence, and ensures predictable costs for businesses, promoting long-term growth.

Question 2

What is the difference between real and nominal values

Answer 2

Nominal values are unadjusted for inflation and reflect current prices.
Real values are adjusted for inflation, showing the true purchasing power of money over time.

Question 3

How are inflation rates measured using the Consumer Prices Index (CPI) and Retail Prices Index (RPI)?

Answer 3

CPI: A measure of inflation based on the price changes of a fixed basket of goods and services that represents typical consumer expenditure.
RPI: Similar to CPI, but includes housing costs (e.g., mortgage interest payments) and tends to show a higher rate of inflation.

Question 4

Causes of inflation

Answer 4

Cost Push and Demand Pull

Question 5

Consequences of Inflation

Answer 5

Fall in the value of money (Purchasing Power), Fall in real ROI, Uncertainty, Loss of international competitveness, Fiscal Drag, Shoe Leather Costs

Question 6

Causes of Deflation

Answer 6

Demand Falls and Decrease in COP

Question 7

Consequences of Deflation

Answer 7

Deflationary Spiral, Increase in real value pf debt, Fall in Animal Spirits