Inflation

Question 1

Deflationary spiral

Answer 1

• consumers see prices falling and save money as they wait for prices to fall further - AD shifts in further
  ^^ decreases real GDP significantly and increases unemployment (derived demand)

Question 2

How does inflation impact the value of money?

Answer 2

decreases the value of money

Question 3

Definition of real income

Answer 3

nominal income with the effects of inflation removed - how much your income is really worth

Question 4

Steps in calculating price level

Answer 4

• ONS interview 7000 households (Living costs and food survey) to find 650 most commonly bought goods/services
• ^^ find what % of total spending goes on each
• conduct price survey to find average price of each good
• take weighted average to find price level

Question 5

Formula for index number

Answer 5

current number / base number x 100

Question 6

What is CPI used for?

Answer 6

to calculate inflation rates more easily

Question 7

How to calculate change in index number (change in inflation) without using base year

Answer 7

new price index - old price index / old x 100

Question 8

Benefits of high inflation

Answer 8

• protects against negative inflation
• reduced value of debt and hence inequality
• decreased wages lowers cost for firms/gov

Question 9

Problems with high inflation

Answer 9

• price-wage spiral (higher wages, increase COP = more inflation) = hyperinflation
• reduce real wages and savings thus increase inequality
• risk and uncertainty (decreased investment)