Inflation

Question 1

inflation

Answer 1

the sustained or persistent increase in the general price level over a SPOT

Question 2

consumer price index

Answer 2

measures the percentage change of a weighted basket of goods and services the average household consumes over a SPOT

Question 3

how is the rate of inflation calculated

Answer 3

1. items selected
2. base year selected
3. price changes recorded
4. weights allocated to individual items
5. weighted price index calculated
6. total divided by total number of weights

Question 4

limits of the CPI as a measure of inflation

Answer 4

-not fully representative
-spending patterns
-changing quality of goods and services
-new products/slow response

Question 5

disinflation

Answer 5

a falling rate of rate. prices are rising at a falling rate.

Question 6

demand-pull inflation

Answer 6

occurs when there is excess demand within an economy, this means there is too much money chasing and too few goods, which incentivises firms to put up there prices.

Question 7

cost-push inflation

Answer 7

occurs when firms throughout an economy experience rising costs if production, this squeezes their profit margins so they pass the burden onto the consumers via higher prices.

Question 8

monetary inflation

Answer 8

ultimately as the money supply increases so does inflation.
MV = PT

Question 9

consequences of inflation

Answer 9

NEWSFM
Negative real interest rates
Export prices
Wage price spiral
Shoe leather costs
Falling real incomes
Menu costs
+ business uncertainty and fiscal drag

Question 10

advantages of inflation

Answer 10

-enables economic growth
-allows adjustment of real wages
-allows adjustment of prices
-instills confidence for businesses & consumers about future consumption & investment decisions

Question 11

deflation

Answer 11

the persistent fall in general price level of goods and services . the rate of inflation becomes negative

Question 12

malevolent deflation/ demand side causes

Answer 12

-deep fall in AD causing a persistent recession/depression
-large negative output gap ie. high level of spare capacity

Question 13

benign deflation/supply side causes

Answer 13

-improved productivity
-technological advances

Question 14

consequences of deflation

Answer 14

-consumption postponements
-positive real interest rates(increased cost of borrowing)

Question 15

positives if deflation

Answer 15

-improved international competitiveness of goods
-joyflation (rising real incomes means consumers have greater real purchasing power)