AC 2.3 Flashcards
What is inflation?
Average prices are rising.
Define deflation.
Average prices are falling.
What is disinflation.
Average prices are increasing but at a slower rate.
How do economists distinguish hyperinflation?
A rate both unpredictable & sufficiently high to disrupt the functions of money.
Explain how inflation is measured using CPI.
By tracking the percentage change in the price of a fixed basket of goods and services typically purchased by households over a specific period.
What are the limitations of CPI?
- Excludes certain goods & services
- Ignores quality
- It’s just an average
- Households switch to cheaper alternatives
- Statistical error
Explain the main differences between the RPI & CPI measures of inflation.
RPI includes housing costs like mortgage interest and council tax, while the CPI excludes these and focuses on a broader range of goods and services.
Explain demand-pull and cost-push inflation.
Demand-pull inflation occurs when aggregate demand exceeds aggregate supply, driving up prices, while cost-push inflation happens when production costs increase, leading to higher prices for goods and services.
State the negative effects of inflation on consumers, firms, government & workers.
Consumer - Wealth Inequality
Firms - Increased Input Costs
Worker - Fall in Real Wages
Government - Disequilibrium
Are there any benefits of inflation?
It can encourage spending and investment.
State the aim of the Bank of England’s Monetary Policy Committee.
To maintain price stability by targeting an inflation rate of 2% and in a way that helps sustain growth and employment.
What are the 3 components of monetary policy?
- Interest Rates
- The Money Supply
- The Exchange Rate
What is QE?
A monetary policy where a central bank purchases government bonds or other financial assets to increase the money supply and stimulate economic activity.
List the pros of monetary policy.
- Flexibility
- Inflation Control
- Unemployment Reduction
List the cons of monetary policy.
- Time Lag
- Inflation Risk
- Asset bubbles
