Inflation

Question 1

Definition (Inflation)

Answer 1

A persistent/sustained rise in the average price level

Question 2

Explanation (Inflation)

Answer 2

Decrease in the purchasing power of money over time - how much we can buy with it, less with the same amount of money because prices have increased

Question 3

Government’s objective (inflation)

Answer 3

2% +/- 1%, Government and chancellor of exchequer but Bank of England needs to achieve it

Question 4

Eurozone (Inflation target)

Answer 4

All use of euro controlled by the European Central Bank which controls inflation <2%

Question 5

Disinflation

Answer 5

Decrease in inflation

A fall in the rate of inflation, e.g. Inflation falls from 3 to 2%

Question 6

Measurement (Inflation)

Answer 6

Consumer Price Index (CPI)

Retail Price Index (RPI)

Question 7

Consumer Price Index (CPI)

Answer 7

1. Every month
2. 700 Items in a basket
3. Weights are placed by the importance of the good
4. Looking for an increase or decrease in the average price level of the basket

Question 8

Retail Price Index (RPI)

Answer 8

RPI includes house costs where as CPI excludes them

Question 9

Types of inflation

Answer 9

Demand-Pull

Cost-Push

Question 10

Demand-pull

Answer 10

1. Caused by AD rising faster than AS
2. Excess demand in the economy -> firms raise prices to ration the goods and services
3. It is most likely to occurs where there is little spare capacity in the economy - high growth/boom phase
4. Too high demand
5. High consumer business confidence
6. Rise in Exports
7. Government policy

Question 11

Cost-push

Answer 11

1. SRAS inwards, rise in the costs of production
2. Increase in the costs of production for a firm - rise in price of raw materials
3. As cost production increases firms cannot afford to produce as many goods and services so increase price to cover the higher costs -> Causes the SRAS to fall in the economy
4. Could also be caused by a fall in the exchange rate as increases in price of imported raw materials

Question 12

Comprising Demand-Pull and Cost-Push

Answer 12

Cost-Push is worse. Demand pull is coming from a positive place and AD is increasing. Cost-Push is bringing no positive outcome to the economy

Question 13

Quantity theory of money

Answer 13

An alternative theory of inflation based on the finer equation

Question 14

Fisher Equation

Answer 14

MV = PQ
M : Money supply
V : Velocity of circulation
P : General price level
Q : Real value of national output

V and Q are assumed to be constant

Therefore changes in M will have a direct impact on P