5. Inflation

Question 1

What is deflation?

Answer 1

A sustained decrease in the general price level of goods and services in an economy

Question 2

What is retail price index (RPI)?

Answer 2

A measure of inflation that tracks the changes in price of a fixed basket of goods. and includes housing costs e.g mortgage, council tax

Question 3

What is inflation?

Answer 3

A sustained rise in the overall average price level in an economy

Question 4

What is demand-pull inflation?

Answer 4

Inflation caused by a rise in aggregate demand

People are spending more and firms may not be able to increase production quick enough

Question 5

What is core inflation?

Answer 5

A measure of the inflation rate that excludes temporary volatile factors e.g energy/food prices

Question 6

What is cost-push inflation?

Answer 6

Inflation caused by rising costs

Higher costs means that its harder for firms to produce so higher prices passed on to consumers

Question 7

What is disinflation?

Answer 7

When the rate of inflation falls but is still positive (prices are still rising but at a slower rate)

Question 8

Describe the debt deflationary spiral

Answer 8

• Deflation creates future price fall expectations + consumption is postponed
• Postponed consumption results in falling revenue and demand
• Falling prices increase real value of debt making it harder to repay
• Increased bankruptcies so banks reluctant to issue loans

Question 9

Why is deflation not necessarily bad?

Answer 9

• May be caused by sustained falls in factor costs e.g oil prices (reduced production costs=increased profits)
• May be caused by long term productivity improvements e.g technological advances

Question 10

What is a deflationary spiral?

Answer 10

When falling prices cause further deflationary pressures to cut prices

Question 11

What is the formula for price index?

Answer 11

Price of basket in specific year/ Price of basket in base year x 100

Question 12

What is consumer price index (CPI)?

Answer 12

A measure of inflation that focuses on the average change in prices that consumers pay for goods/services in an economy over time

Question 13

What is CPIH?

Answer 13

An extension of CPI that includes owner occupier housing costs

Question 14

How do you calculate weighted price index?

Answer 14

Year A:
(price of good x weight) + (price of good x weight)

Year B:
(price of good x weight) + (price of good x weight)

Percentage change of Year A + B

Question 15

What is NAIRU?

Answer 15

Non accelerating inflation rate of unemployment

The level of unemployment at which inflation is stable/constant in the economy

Question 16

What does the long run phillips curve suggest?

Answer 16

There is no trade-off between unemployment and inflation. The two variables are unrelated

Question 17

What does the phillips curve suggest?

Answer 17

There is a trade-off between the rate of unemployment and inflation. They have an inverse relationship

Question 18

Explain the trade-off between unemployment and inflation

Answer 18

As economic growth increases, unemployment falls due to the creation of new jobs. This causes wages to increase leading to more consumer spending and therefore increase in price level