Inflation

Question 1

What is inflation

Answer 1

Inflation refers to the persistent rise in the price of goods and services in an economy

Question 2

How is inflation measured

Answer 2

Inflation is measured using the consumer price index

Question 3

How is the cpi calculated

Answer 3

1) ons send out a survey to household which asks them goods and services they buy, how much they buy, how much they pay where they buy and the % of income
2) the ones then make a basket of goods of the most popular goods and services is formed with average prices taken into account -> reflective of the average house hold
3) the price of the goods are then weighted in terms of income e.g oil takes 10% weighted at 0.1 (0 - 1)
4) weighted prices are then added up to get the total weight

Question 4

Who’s are index numbers calculated

Answer 4

Raw number/ base year raw number x 100

Question 5

How is the index number change calculated

Answer 5

Difference/original x 100

Question 6

What is the difference between rpi and cpi

Answer 6

• rpi is calculated arithmetically so will always be greater than cpi
• rpi takes into account things such as housing costs
• on average 1.2 % more

Question 7

What are weaknesses of cpi

Answer 7

• the average family from the ons is not applicable to everyone such as richer families will spend lots of money on holidays and lower incomes don’t. Increase in holiday prices will lead to a change in the value of inflation however personal inflation will always be different
• doesn’t take into account increases in the quality of goods
• shrinkflation -> changing size rather than price

Question 8

What are the causes of inflation

Answer 8

• demand pull inflation
• cost push inflation

Question 9

What si demand pull inflation and what causes it

Answer 9

Demand pull inflation is when there is a large increase in aggregate demand, this causes more pressure to be put on factors of production which leads to prices of fop to increase through higher wages and higher costs of capital -> these prices are then passed onto consumers

Question 10

What can cause increases in Ad

Answer 10

• lower interest rates
• lower taxes
• increased consumer confidence
• greater government spending
• weaker exchange rate

Question 11

What is cost push inflation and what is if caused by

Answer 11

Cost push inflation is caused by a leftwards shift in SRAS
This leftwards shift is caused by increases in cost of productions

Question 12

What causes a shift is SRAS

Answer 12

• increase cost of production
• higher wages
• Higher taxes
• higher raw material prices
• weaker Exchange rate

Question 13

Draw cost push and demand pull inflation

Question 14

What are some costs of inflation

Answer 14

• decreases purchasing power parity -> less can be bought fall in living standards
• erosion fo savings if interest rates are less than inflation rate
• can lead to wage spirals -> wages increase leading to costs increasing causing even more inflation
• fiscal drag
  Decreases in competitiveness
  Increased uncertainty

Question 15

What are some benefits of inflation

Answer 15

• higher wages for workers with high wage bargaining power -> can lead to fiscal drag tho
• low and stable inflation cns lead to increased economic growth and profits for firms