Inflation Flashcards
1
Q
What is the Inflation Rate?
A
The change in average prices in an economy over a given period of time
2
Q
What are the two measures of price level?
A
- CPI
- RPI
3
Q
Why does the figures given by RPI differ to CPI?
A
- RPI uses an arithmetic mean, the Carli Index
- CPI uses a geometric mean
- RPI includes includes mortgage costs interest rate payments and council tax
- RPI excludes top 4% of incomer earners and low income pensioners as they are not typical households
- Due to housing prices rising RPI tends to have a higher rate of inflation
4
Q
What are Redistribution Effects
A
- Inflation redistributes income away from certain groups and toward other groups in the economy
- Certain groups lose some PPP and become worse off whilst others gain
5
Q
What are the effects of inflation on people who receive fixed income or wages?
A
As GPL increased they become worse off
- Workers having wage contracts, fixing their wages
- Pensioners received fixed pensions
- Landlords receive fixed rental incomes
- Individuals who receive fixed welfare payments
- Those who’s income rises less rapidly than the rate of inflation
6
Q
Who else is worse off due to inflation?
A
- Holders of cash, purchasing power of cash falls
- Savers, real value of their money decreases if rate of interest is not the same as inflation
- Lenders who give money, the money they relieve back if no interest is charged would be worth less
7
Q
Who gains due to inflation?
A
- Debtors/Borrowers, as long as interest rate is below rate if inflation then they pay back less money
- Payers of fixed incomes/wages, real value of the payments decrease
- Payers of income that increases less rapidly than the rate of inflation
8
Q
How does inflation cause uncertainty?
A
- Inability to predict inflation means you cannot predict purchasing power of money
- Firms become cautious of future plans as they cannot forecast their revenue
- Fewer investments as a result and therefore less economic growth
9
Q
How does inflation affect Menu Costs?
A
- Due to changing prices firms may have to continuously print new menus, catalogues etc
- The higher the rate of inflation, the more often firms have to print new menus and therefore incurring menu costs
10
Q
What is Money Illusion?
A
- The idea that some people may feel better when their nominal income increases despite GPL increasing at same rate or even faster
- Real income or purchasing power may have not changed or even be lower
- Leads to consumers making wrong decisions
11
Q
How does inflation affect international export competitiveness?
A
- When domestic PL increases faster than foreign PL then their exports become more expensive to foreign
- Their international competitiveness goes down
- Exports down, imports up
- Presents difficulties for the balance of payments of a country
12
Q
What is the ideal rate of inflation?
A
2-3% per year
13
Q
What is demand-pull inflation?
A
- When aggregate/total demand rises with no increase in aggregate supply (excess demand in the economy)
- Too much demand will cause PL to rise
14
Q
Why does demand-pull inflation occur?
A
- Consumer spending excessively rising, low interest rates and increased consumer confidence
- Forms may increase spending on investment, e.g needing extra capacity to respond to demand increase
- Gov increasing spending or cutting tax
- World demand for UK exports may rise due to a boom in the economy
15
Q
How does the money supply affect demand-pull inflation?
A
- Can increase inflation due to growth of the money supply
- If central banks lend more money to consumers, the money supply grows
- Consumers are more inclined to spend and therefore aggregate demand grows
- This causes inflation
