2.5.3 Inflation (INCOMPLETE)

Question 1

what is inflation?

Answer 1

Inflation is a sustained increase in the average price level in the economy; there is a fall in the value in money.

Question 2

How is the rate of inflation measured?

Answer 2

by the % change in in the level of prices.

Question 3

Why is inflation a serious problem?

Answer 3

because it creates uncertainty as it is hard to know whether it will accelerate or slow down.

Question 4

What is the government’s target rate for inflation?

Answer 4

2%

Question 5

Who is responsible for the rate of inflation?

Answer 5

The Bank of England’s monetary policy committee (MPC)

They adjust the base rate to control inflation

Question 6

What is deflation?

Answer 6

A sustained decrease in the average price level in the economy

Question 7

What is disinflation?

Answer 7

The annual increase in the average price level slowed down from the previous period (a decrease in the rate of inflation)

Question 8

What are price indices?

Answer 8

weighted averages of price changes based on average levels of spending on a wide range of consumer goods and services.
They measure changes in the general level of prices

Question 9

What is CPI?

Answer 9

Consumer price index- Is the headline rate and forms the basis for government’s inflation target. It excludes mortgage, interest payments and housing costs.

Question 10

What is RPI?

Answer 10

Retail price index- Includes housing costs (such as council tax) and mortgage interest payments. It is used to decide state pension and benefit levels.

Question 11

What is the rate of inflation?

Answer 11

The annual percentage change in the level of prices from year to year

Question 12

What are real values?

Answer 12

This means the effects of inflation have been removed

Question 13

What are nominal values?

Answer 13

Values expressed in current prices.

Question 14

What are current prices?

Answer 14

They value each item in terms of the prices in that year

Question 15

What are real values expressed in?

Answer 15

constant prices

Question 16

What are the 2 causes of inflation?

Answer 16

demand-pull and cost-push

Question 17

What is demand-pull inflation?

Answer 17

occurs when the economy is overheating in a boom. Aggregate demand exceeds aggregate supply causing prices to rise in response to market pressures. This causes AD to shift to the right.

Question 18

What is cost-push inflation?

Answer 18

Occurs when costs of production are rising. Rent for office space or any other cost may rise. This causes the AS curve to shift to the left

Question 19

What impact does inflation have on firms?

Answer 19

Causes uncertainty- Making it harder to make accurate cash flow, costs and revenue forecasts making it harder to forecast future profits making future investment risky. Leading to less investment

Loss of competitiveness - as exports can be less competitive if competing economies have lower inflation

Question 20

What Impact does inflation have on individuals?

Answer 20

Loss of real income- people on fixed incomes lose out if their wage doesn’t increase with inflation. The same goes for people on benefits and pensions.

Savers lose money as the value of their savings reduce making them worse off.

People who borrow gain because over time the value of money falls as the nominal amount they repay is less than what they borrowed in real terms.