2.5.1 ECONOMIC INFLUENCES (INFLATION)

Question 1

what is inflation

Answer 1

general increase in prices and fall in the purchasing value of money

Question 2

what is deflation

Answer 2

reduction of the general level of prices in an economy

Question 3

how is inflation measured

Answer 3

consumer price index CPI

Question 4

what does CPI measure

Answer 4

the average change over time in the prices paid by consumers for a basket of goods and services

Question 5

how to calculate CPI

Answer 5

(cost of basket in current year / cost of basket in base year ) x 100

Question 6

how does high inflation effect businesses

Answer 6

• businesses may increase prices to pass costs onto consumers or may decide to absorb the cost rises
• businesses will look to reduce internal costs to protect profits

Question 7

how does low inflation effect businesses

Answer 7

• businesses feel confident in a stable economic environment
• businesses may look to grow and invest

Question 8

how does deflation effect businesses

Answer 8

• businesses may struggle to pay debts, assets may have to be sold to pay off debts
• low demand may lead to redundancies and rationalities

Question 9

how does inflation effect businesses?

Answer 9

• increased costs
• uncertainty
• borrowing value decreases
• interest rates are high
• uk exporters lose their competitiveness