Inflation

Question 1

What is inflation ?

Answer 1

The sustained rise in the general price level over time. This means that the cost of living increases and the purchasing power of money decreases

Question 2

What is deflation ?

Answer 2

Where the average price of the economy falls. There is a negative inflation rate

Question 3

What is disinflation ?

Answer 3

The falling rate of inflation. This is where the general price level is rising is rising but at a slower rate

Question 4

What are the 2 types of inflation ?

Answer 4

Demand pull inflation
Cost push inflation

Question 5

What is demand pull inflation ?

Answer 5

Demand pull: When aggregate demand grows unsustainably, there is pressure on resources. Producers increase their prices to earn more profits.

Question 6

What can cause demand pull inflation ?

Answer 6

• A depreciation in the exchange rate, this causes imports to become more expensive, whilst exports become cheaper. This causes AD to rise
• Fiscal stimulates in the form of lower taxes or more government spending. This means consumers have more disposable income, so consumer spending increases
• Lower interest rates makes saving less attractive and borrowing more attractive, so consumer spending increases
• High growth in the UK export market means UK exports increase and AD increases

Question 7

What is cost push inflation ?

Answer 7

This is from the supply side of the economy, and occurs when firms face rising costs

Question 8

What can cause cost push inflation ?

Answer 8

• Changes in world commodity prices can affect domestic inflation. For example raw materials might become more expensive if oil prices rise. This increases cost of production
• Labour costs may become more expensive e.g. trade unions
• Expectation of inflation. If consumers expect prices to rise, they may ask for higher wages to make up for this, this can trigger more inflation
• Indirect taxes could increase the cost of goods such as cigarettes or fuel, if producers choose to pass this cost onto the consumer
• Depreciation in the exchange rate, this would cause imports to become more expensive and push up the price of raw materials
• Monopolies, using their dominant position to exploit consumers with high prices

Question 9

What are the effects of inflation on consumers ?

Answer 9

• Those on low and fixed incomes are hit hardest, due to its regressive effect, because the cost of necessities such as food and water may become too expensive
• If consumers have loans, the value of repayments will be slower, because the amount owed does not increase with inflation, so the real value of debt increases