Economic performance

Question 1

Inflation

Answer 1

Inflation: Refers to the annual increase in the general level of prices. The price level in the uk is measured by CPI.
Common uk problem during the 20th century but since recession of the early 1990s it has been less so

Question 2

Deflation

Answer 2

Deflation: a fall in the average level of prices over time. The UK experienced this in 2015 and is measured by CPI.
Since 2010 both the uk and Europe govts have increasingly begun to worry about deflation.

Question 3

Disinflation

Answer 3

Where the rate of inflation falls but is still positive.

Question 4

Causes of inflation

Answer 4

1. Demand-pull
2. Cost-push

Question 5

Demand-pull inflation definition

Answer 5

Inflation causes by excessively high levels of AD beyond that needed to generate full employment.

Question 6

Demand- pull inflation (explained)

Answer 6

High levels of spending signals to firms to increase output. But as we get closer to the capacity level of the economy ( vertical LRAS curve) the higher spending will lead to firms increasing prices as higher costs to produce output.
Eventually when economy is operating on LRAS any increase in AD will only lead to inflation.
(book for diagram)

Question 7

cost-push inflation (explained)

Answer 7

If costs of production increase, this will reduce business profit margins, unless they raise prices to compensate, thus increasing inflation. However if businesses decide not to raise prices inflation may not occur.
A fall in the exchange rate will lead to higher costs for imported materials. This can be referred to as imported inflation).
Cost-push inflation not only leads to higher prices but also to falling output and likely rises in unemployment at the same time. this combination is known as ‘stagflation’ stagnant growth in national output and inflation occurring together.
(diagram in book) can be shown through decrease in SRAS,LRAS or Keynesian AS curve.

Question 8

The quantity theory of money

Answer 8

An alternative explanation for inflation which states that the only cause of inflation is excessive growth in the money supply.
Based on Fisher equation also known as the equation of exchange.

Question 9

Velocity of circulation

Answer 9

The rate (how fast) at which money circulates around the economy-i.e how many times the same banknote is used over a period of time

Question 10

The fisher exchange