inflation

Question 1

definition of inflation

Answer 1

the sustained rise in the average price level of goods/ services over a period of time

Question 2

measurments of inflation

Answer 2

consumer price index (geometric mean of a basket of goods)

retail price index

Question 3

types of inflation

Answer 3

demand-pull (AD shifts to the right)

cost-push (AS shifts to the left)

Question 4

demand -pull inflation (def, policies, why)

Answer 4

demand in the economy increases prices
monetary policy (interest rates and QE)
could be caused by a change in demand components, eg consumer confidence

Question 5

cost-push inflation (def, policies, why)

Answer 5

FOPs increase in price causes fall in SRAS
fiscal policy tackling supply
caused by possible increase in price of exports

Question 6

deflation

Answer 6

the persistent fall in the average level of prices

Question 7

disinflation

Answer 7

where the rate of inflation decreases

Question 8

spiral of inflation

Answer 8

monetarist view, as either AD or SRAS shift, a shift of the other will result because LRAS takes longer to change

Question 9

costs of inflation

Answer 9

loss of purchasing power (inflation faster than incomes-benefits)
discourage saving (vice versa for deflation)
commercial interest rates
international competitiveness (exports less competitive..)
uncertainty
labour unrest (if wages not keeping up with inflation)

Question 10

explain loss of purchasing power

Answer 10

If there is inflation, but have same income=fall in real income;
inflation linked incomes (can be due to strong trade unions), inflation can be higher than expected

Question 11

how inflation discourages saving

Answer 11

better to spend earlier,

people who want to save will start spending on fixed assets (housing)

Question 12

how commercial interest rates are affected by inflation

Answer 12

banks want to keep making money, will raise interest rates on borrowing and lower on savings

Question 13

effect on international competitiveness

Answer 13

exports may decrease as price increases, but imports increase because of lower price

Question 14

uncertainty because of inflation

Answer 14

discouraged investment because of uncertainty in the economy

Question 15

types of deflation

Answer 15

good deflation

bad deflation

Question 16

good deflation

Answer 16

due to improvements in the supply-side of the economy and/or improved productivity; LRAS; results in increased real output and fall in unemployment

Question 17

bad deflation

Answer 17

from demand-side of the economy

reduced real output and employment

Question 18

costs of deflation

Answer 18

Udi
unemployment (companies lay off worker as consumers wait for prices to be at lowest(deferred consumption) then confidence decreases)
investment (less profits and lower business confidence reduces investment)
debtors (value of debt rises with deflation)

Question 19

limitations of cpi

Answer 19

basket made for typical family, not all
(regional difference not included, affect on wages)
data collection errors (all has to be samples)
changes in the contents of baskets according to consumer spending, difficult for analysis
different methods create international inaccuracies
seasonal changes could affect it
does not include prices of fops (commodity price index; could indicate cost-push pressures)

Question 20

monetarist- excess monetary growth cause

Answer 20

they believe inflation always caused by an excess supply of money in an economy; increases in AD are purely inflationary

Question 21

reducing inflation evaluated

Answer 21

(higher taxes reducing disposable income and consumption/ lower government spending UNPOPULAR (eg. subsidized theatres in UK))
TIME LAG between need for change and legislation
central bank control DE-POLITICIZES it
fiscal policies have larger time-lapse,
monetarists- SUPPLY regulated to national output
elected governments do not always have LONG-TERM INTEREST at heart

Question 22

importance of independent central bank

Answer 22

can make politically unpopular decisions; as long as confidence in them, then less expectations of inflation therefore reducing cost-push pressures as they don’t ask for wages to increase