Global Economy

Question 1

Define Inflation

Answer 1

Inflation is a rise in the general price level

Question 2

Define cost-push inflation

Answer 2

Cost push inflation is inflation caused by an increase in costs of factors of production

Question 3

How does cost-push inflation lead to higher prices for consumers?

Answer 3

It costs producers more to produce the goods, so they are forced to pass this cost onto consumers in the form of higher prices

Question 4

Give 2 specific examples of things that can directly cause cost-push inflation

Answer 4

1. A rise in the cost of imported raw materials

2. A rise in indirect taxes on goods

Question 5

Define demand-pull inflation

Answer 5

Demand pull inflation is inflation caused by excessive growth in aggregate demand compared to supply.

Question 6

Why does demand-pull inflation cause higher prices?

Answer 6

Because if demand is increasing, this allows firms to raise the price

Question 7

Give 2 specific examples of what can directly cause demand-pull inflation

Answer 7

1. High demand for exports

2. Money supply growing faster than output

Question 8

What effect will inflation have on people’s standard of living?

Answer 8

It will cause the standard of living of people on fixed or near-fixed incomes to fall, or those who claim state benefits

Question 9

What will happen to a country’s competitiveness as a result of inflation? And why?

Answer 9

It will be reduced because exports become more expensive and imports become cheaper, which can also lead to a current account deficit

Question 10

What effect does inflation have on savings? And what is the knock on effect of this?

Answer 10

Inflation discourages saving because the value of savings falls. This causes increased consumer spending, causing further demand pull inflation

Question 11

What is the effect of inflation on investment? And why?

Answer 11

Investment will decrease as a result of inflation, because inflation creates uncertainty for firms because of rising costs

Question 12

Define deflation?

Answer 12

When the rate of inflation falls below 0%

Question 13

Give 2 possible causes of deflation

Answer 13

1. If a firms costs fall and this is passed onto consumers on the form of lower prices
2. Through falling aggregate demand and increased unemployment

Question 14

What might happen to consumer spending if prices fall (think speculation) and will the knock on effect of this be?

Answer 14

Consumer spending might fall because if prices are falling, consumers might expect them to fall further and therefore delay their consumption. The knock on effect of this is that less spending and lower prices means less profits for firms and so reduced economic growth.