CH26 Inflation

Question 1

What is inflation?

Answer 1

A general and continuing rise in prices

Question 2

What is deflation?

Answer 2

A fall in average prices

Question 3

What is demand pull inflation?

Answer 3

Inflation caused by too much demand in the economy relative to supply
If demand increases -> Increase in price
if AD increases -> Increase in general price level

Question 4

What is cost push inflation?

Answer 4

Inflation caused by rising business costs

Question 5

What could cause demand push pull inflation?

Answer 5

-Rising consumer spending
-Sharp increases in government spending
-Rising demand for resources by firms
-Booming demand for exports

Question 6

What are interest rates?

Answer 6

Prices paid to lenders for borrowed money, it is the price of money.

Question 7

What is Hyperinflation?

Answer 7

situations where the prices of all goods and services rise uncontrollably over a defined time period.

Question 8

What is the consumer price index? (CPI)

Answer 8

Measure of the general price level (excluding housing costs)

Question 9

What is the retail price index? (RPI)

Answer 9

Measure of the general price level, which includes house prices and council tax

Question 10

What is meant by the term Purchasing Power?

Answer 10

Amount of goods and services that could be bought with a fixed sum of money

Question 11

What is aggregate demand?

Answer 11

Total demand in the economy, including consumption, investment, government expenditure and exports minus imports

Question 12

What is the impact of inflation on Prices?

Answer 12

Prices will rise due to inflation. Inflation also reduces the purchasing power of money.

Question 13

What is the impact of inflation on wages?

Answer 13

When prices increase due to inflation, workers will ask for higher wages to compensate for the decrease in purchasing power. But firms might need to decrease wages due to the inflation as well. This will lead to conflict between both parties

Question 14

What is the impact of inflation on exports?

Answer 14

If inflation is higher at home than in other countries, firms may find it difficult to sell to overseas market. This is because price of exports rise

Question 15

What is the impact of inflation on unemployment?

Answer 15

High levels of inflation can lead to more employment as AD rises. Firms will need to increase production since the price of goods are increasing, Firms will therefore need to recruit more workers to increase their output levels.

Question 16

What are menu costs?

Answer 16

Costs to firms of having to make repeated price changes

Question 17

What are the impacts of inflation on menu costs?

Answer 17

If inflation rises quickly, Firms will need to change their prices frequently. This will cost money because e,g printing new brochures or updating websites will have to happen frequently and this costs money.

Question 18

What are shoe leather costs?

Answer 18

Costs to firms and consumers of searching for new supplies when inflation is high

Question 19

What are the impacts of inflation on shoe leather costs?

Answer 19

When prices are changing frequently, consumers and firms will have to take a long time trying to find the cheapest and best substitute. This is a cost as going around trying to find the best substitute needs you to walk around and pay for transport fares.