38) Inflation

Question 1

What is the definition of inflation?

Answer 1

Inflation is defined as a sustained rise in the general levels of price across an economy

Question 2

What is the opposite to inflation?

Answer 2

Deflation

Question 3

What is disinflation?

Answer 3

When prices are rising but at a decreasing level (in other words inflation is falling)

Question 4

What is hyperinflation?

Answer 4

Hyperinflation is where inflation is very high (sometimes considered to be 50%+ per month, 13000% p.a.)

Question 5

When did hyperinflation occur in real life?

Answer 5

Germany, 1923

Question 6

What is reflation?

Answer 6

Reflation is where an economies GDP grows following a recession

Question 7

What is Stagflation?

Answer 7

Stagflation is where inflation is rising at the same time as the economy is in a recession

Question 8

What are deflationary policies?

Answer 8

Deflationary policies attempt to reduce inflation NOT cause deflation

Question 9

How is inflation measured?

Answer 9

A basket of goods and services is created and different weightings (level of importance) are given to the different goods and services. This is measured over time for price changes.

Question 10

Is inflation measured accurately?

Answer 10

• Not accurate to all people at all times
• The inflation basket is regularly updated however it does not take into account quality e.g. cars may increase in price because of quality improvements and not purely inflation

Question 11

What are the two causes of inflation?

Answer 11

• Significant increases in demand (demand-pull inflation) C+I+G+(X-M)
• Significant decreases in supply (cost-push inflation)

Question 12

What are the costs of high inflation?

Answer 12

1) Planning for the future becomes difficult
2) Firms become less competitive
3) Fixed incomes may suffer
4) Savers will lose and debtors will gain
5) Government lose tax revenue
6) Reduced living standards
7) Political unrest
8) Strikes (reduced output)
9) Shoe-Leather costs
10) Menu costs

Question 13

What are the benefits of low and stable inflation?

Answer 13

1) Gives policy makers room
2) Encourage borrowing to buy assets

Question 14

What are menu costs?

Answer 14

Small costs that a business pays when they change their prices, like price tags or printing new menus

Question 15

What are shoe-leather costs?

Answer 15

The extra time and effort people spend managing their money usually during high inflation