2.4 Inflation Flashcards
What is inflation?
A general, sustained increase in the price level or a fall in the purchasing power of money.
Define deflation.
A fall in the price level and an increase in the purchasing power of money.
What is disinflation?
A fall in the rate of inflation; the price level is still rising but at a slower rate.
What is hyperinflation?
When inflation is out of control and there are massive, rapid rises in the general price level.
What is the policy objective of low and stable inflation?
To maintain a low and stable rate of increase in the price level.
What are real values?
Values adjusted for inflation.
What are nominal values?
Values not adjusted for inflation.
How is inflation measured using the Consumer Prices Index (CPI)?
By calculating the change in the average price level over time.
What is the target CPI rise set by the government each year?
2%.
What does CPIH include?
The cost of owning, living in and maintaining a home, excluding mortgage interest payments.
What is the difference between CPI and RPI?
CPI includes pensioner households and high-income households; RPI does not.
True or False: The RPI is an older measure of inflation than the CPI.
True.
What happens to average hourly wages when inflation rises?
They may not keep pace with rising prices, affecting household purchasing power.
What is the inflation rate?
The annual percentage change in the average price level in an economy.
What is anticipated inflation?
Inflation that is expected and accounted for in economic planning.
What is unanticipated inflation?
Inflation that is not expected and can negatively affect economic decisions.
What is the impact of hyperinflation on savers?
It erodes the value of savings, making them worthless.
What major problem does hyperinflation often lead to?
Mass printing of cash.
What is the purpose of indexation?
To adjust economic variables like wages and pensions according to inflation.
What are the three main measures of inflation?
CPI, RPI, and CPIH.
What does the Consumer Prices Index represent?
A basket of goods and services, a measure of changes in the price level.
What is demand-pull inflation?
Inflation that occurs when demand for goods and services exceeds supply.
What is cost-push inflation?
Inflation that occurs due to rising costs of production.
What is a wage-price spiral?
A situation where rising wages lead to increased costs for businesses, which then raises prices.
What is the role of the Bank of England’s Monetary Policy Committee?
To ensure inflation remains at the target rate.
What is the significance of the base rate set by the MPC?
It influences borrowing costs and spending in the economy.
What does the term ‘weights’ refer to in the context of CPI?
The relative importance of goods and services in the inflation calculation.
How does inflation affect planning for businesses?
It creates uncertainty, making it difficult to forecast costs and prices.
What is the impact of rising world commodity prices on inflation?
They can lead to higher overall price levels.
What are the problems experienced in Japan as a result of deflation?
Stagnant economic growth and decreased consumer spending.
What solutions have been proposed in Abenomics?
Monetary easing, fiscal stimulus, and structural reforms.
