Inflation

Question 1

Inflation

Answer 1

The sustained or persistent increases in the general price level over a SPOT

Question 2

How is inflation measured

Answer 2

Through the CPI (a typical basket of goods)

Question 3

What is the BoE target for inflation

Answer 3

2%

Question 4

CPI

Answer 4

Measures the percentage change of a weight basket of G/S the average household consumes over a SPOT

Question 5

How CPI is measured

Answer 5

1. A base year is selected
2. A representative of a G/S is selected
3. Weights are attached to each item which depends on how important each item is
4. Each month the government collect 120k price quotations
5. Weight prices are changed and rate is calculated

Question 6

Limitations of CPI (4)

Answer 6

• It’s not fully representative: people will have their own rate
• People have different spending patterns: some households consume more
• Quality isn’t considered: if the quantity goes up but the price doesn’t
• CPI slow at adding new items

Question 7

Cost push inflation

Answer 7

Occurs when businesses experience high COP, this squeezes their profit margin so they pass the burden onto the consumer in the form of higher prices.

Question 8

How does cost push inflation occur? (3)

Answer 8

Rises in Tax
Rises in Labour cost
Rises in cost of Raw materials

Question 9

Demand pull inflation

Answer 9

Caused by excess demand within the economy, which means there is too much money chasing too few goods, this incentives firms to push up the price

Question 10

Monetary inflation

Answer 10

Based on the quantity theory of money, this is explained by the fisher equation

Question 11

Fisher equation

Answer 11

MV=PT

Question 12

Fisher equation explained

Answer 12

Since velocity of circulation and long-term GDP are relatively constant, money supply and the price level have a positive relationship