5. Inflation

Question 1

what is price level?

Answer 1

price level is the average price of goods and services in the economy

Question 2

what is CPI?

Answer 2

consumer price index is a measure of the price level, used by the bank of england to measure inflation against its target

Question 3

what is RPI ?

Answer 3

retail price index is the measure of price level

Question 4

what is the inflation rate?

Answer 4

the percentage change in CPI

Question 5

what does the ‘weight’ of our goods and services mean?

Answer 5

the relative importants of the goods and services

Question 6

how do you calculate price index ?

Answer 6

times the proportion of total spending (0.75) by the percentage increase in price (8) do this for evey good and add up the total

Question 7

what are the key measures of inflation?

Answer 7

• CPI calculated based on collecting prices for a basket of goods
• CPIH (adds housing costs and counsil tax)
• RPI uses a different basket of goods to CPI and includes mortgage payments and counsil tax

Question 8

what is demand pull inflation?

Answer 8

inflation which is caused by excess demand in the economy
- shown by AD shifting to the right on AS curve = inflation

Question 9

what is cost push inflation?

Answer 9

inflation caused by an increase in the costs of production in the economy
- an increase in production costs will push the AS curve to the left

Question 10

what are the causes of inflation?

Answer 10

demand pull inflation
cost push inflation
increase in money supply

Question 11

what is the impact of inflation on consumers?

Answer 11

• higher prices = cost of living crisis
• decreased Yd = less consumption and decreased standard of living
• loss of purchasing power parity if wages dont keep up

HOWEVER,
incomes may be increased in line with inflation

Question 12

what are the impacts of inflation of firms ?

Answer 12

• less profits due to less consumption
• have to cut peoples jobs to keep profits = less productive
• uncertainty = less inventment

HOWEVER,
- fall in value of the pound could reduce export prices and increase competitiveness

Question 12

what are the effects of inflation on goverment ?

Answer 12

• higher costs to provide public services and infrastructure = less investment into the economy
• loss of real tax revenue (less purchasing power)

Question 13

what are the effects of inflation on workers?

Answer 13

job losses due to firm uncertaainty and cutting costs
- individuals pay tax at higher rates if allowences and tax brakets are not increased