Inflation Flashcards

1
Q

What 3 things does monetary policy concern

A

Interest rates
Money Supply
Exchange rates

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2
Q

What are interest rates

A

The cost of borrowing or the reward for saving

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3
Q

Give one example of expansionary monetary policy

A

A decrease in interest rate

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4
Q

Apart from the ratio of spending/saving, what other effect does rising interest rates have on consumers

A

Decreased confidence

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5
Q

What are the two types of inflation

A

Cost push
Demand Pull

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6
Q

Draw the diagram for cost push inflation

A
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7
Q

Draw the diagram for demand pull inflation

A
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8
Q

Why is demand pull sometimes considered as ‘good inflation’

A

It is accompanied by GDP growth

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9
Q

Give 4 causes of demand pull inflation

A

Higher incomes
Lower interest rates
Lower income tax
Increase in government spending

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10
Q

Why is cost push seen as ‘bad inflation’

A

It is accompanied by a fall in GDP

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11
Q

What are 4 causes of cost push inflation

A

Increase in wages (min wage)
Rise in production costs
Rise in corporation tax (Budget links to NI for emplyers, possibly being inflationary )
Rise in global commodity prices

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12
Q

What is inflation

A

Inflation is the increase in the average price level over time

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13
Q

How is inflation calculated

A

Calculated by the ONS - they look at goods and services bought by the average family in a metaphorical basket of goods

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14
Q

In the CPI measure, how are categories in the basket weighted

A

Each category is weighted according to the proportion of income spent on each category by the average family

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15
Q

How can we alter the the CPI measure to be more accurate for a specific group of consumers

A

By varying the weightings of the basket of goods, or by altering the categories all together

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16
Q

What is index linking

A

Moving anything in line with inflation
(Like wages, benefits etc)

17
Q

Why might we want a CPI measure for for pensioners or students

A

May use it to move state pension/ student loan in line with inflation

18
Q

Give 7 costs of inflation (GAUMIDE)

A

FISCAL DRAG

  • Hinders economic growth
  • Creates uncertainty
  • Decreases international competitiveness
  • Less disposable income for consumers
  • Erodes the value of savings
  • Menu/shoe leather costs
  • Allocation process in a free market is less efficient (decrease in allocative efficiency)
19
Q

What is the effect of inflation creating uncertainty

A

Erodes business confidence and decreases investment

20
Q

How does inflation reduce growth (2 ways)

A
  • Reduces the spending power of consumers which reduces AD
  • Contractionary monetary policy in response to inflation (rise in interest rates) leads to less AD
21
Q

Explain the impact of inflation affecting international competitiveness

A

UK exports are more expensive relative to other countries

22
Q

How may inflation make the distribution of income more uneven

A

High income earning private sector workers are more likely to receive above inflation pay rises than the public sector

23
Q

Apart from public sector workers, which group is likely to see real incomes fall due to inflation

A

Those on relatively fixed incomes (Pensioners/benefits)

24
Q

Explain how inflation erodes the value of savings

A

If interest rate on a savings account keep up with the inflation rate, this can be prevented. However, REAL INTEREST RATES tend to be negative

25
What is a real interest rate
I/R - inflation rate
26
What is a menu cost
Metaphor for the time and effort required to update prices
27
Give an example of a menu cost
Changing packaging on something that says 25p when increasing the price
28
What is a shoe leather cost
The time and effort required to check that updated prices (due to inflation) are still the best deals (from suppliers and for consumers)
29
How does inflation lead to a decrease in allocative efficiency
Due to the signalling function of price no longer working as effectively
30
What is fiscal drag
- Incomes may rise, yet getting placed in a higher tax band means a greater proportion of income is taxed
31
Explain fiscal drag
- A rise in nominal incomes leads to a greater proportion of that income being taken in tax-because we have a progressive, banded system - This means net income is reduced because a greater proportion is lost in tax
32
How may fiscal drag benefit the government
Fiscal drag means a greater proportion of income is lost in tax, leading to an increase in revenue for the government
33
What is the plan for interest rates over the next few months
The Monetary Policy Committee has indicated that further reductions may occur if inflationary pressures continue to ease, adopting a gradual and cautious approach to future rate adjustments following criticism of a lack of responsiveness through the cost of living crisis
34
Why does the government not give above inflation pay rises to public sector workers during inflation
As a means to tackle inflation, if they raise their wages, this increases AD and therefore worsens inflation
35
What is the current interest rate
4.5%
36
What is the current inflation rate
3% in January 2025 Up from 2.5% in December 2024
37
What is the new forecast for average inflation this year as mentioned in the Spring statement
Inflation is forecast to average 3.2% this year, up from 2.6% previously forecast, before falling back to 2.1% in 2026 and then hitting the government's 2% target in 2027
38