inflation

Question 1

how to calculate inflation

Answer 1

annual percentage change in consumer prices

Question 2

what is the inflation target and how is it used

Answer 2

2% using the consumer prices index (CPI)

Question 3

who sets monetary policy

Answer 3

the bank of england, so that inflationary pressures are controlled and inflation target is reached

Question 4

what is consumer price index

Answer 4

a measure of the price level of the economy based on the prices of a collection of products designed to reflect the consumption basket of the average consumer

Question 5

what is deflation

Answer 5

a decline in general price level (inflation rate below 0%)

Question 6

what is disinflation

Answer 6

a fall in the rate of inflation, prices are still rising but at a slower rate (5% to 2%)

Question 7

what is hyper-inflation

Answer 7

a period of very high rates of inflation, usually leading to a decline in confidence in an economies currency

Question 8

define inflation rate

Answer 8

the annual rate of change of the average price of goods and services

Question 9

what are unit labour costs

Answer 9

reflect total labour costs, including social security and employees pension contributions , and including the costs of self-employed labour, incurred in the production of a unit of economic output

Question 10

limitations of the consumer price index

Answer 10

1. not fully representative, 14% of the CPI is motoring costs, inapplicable for non-car owners
2. spending patterns - differ from single people to families with children
3. changing quality of goods and services - chjange in price may also be accompanied by change in performance of a product
4. new products - CPI is slow to respond to new products and services, few items fall out/come in

Question 11

when does cost-plus inflation occur

Answer 11

when firms respond to rising costs by incresasing their prices to protect profit margins

Question 12

what can cost-push inflation be caused by

Answer 12

1. rising unit labour costs
2. higher prices for raw materials
3. a depreciation in the exchange rate causing a rise in import costs
4. an increases in business taxes

Question 13

what does cost-push inflation look like on a digram

Answer 13

AD/AS diagram where supply shifts to the left

Question 14

when does demand-pull inflation occur

Answer 14

when AD grows at an unsustainable rate leading to a positive output gap (actual GDP>potential GDP)

when there is excess demand, producers can raise their prices and thereby achieve bigger profit margins

demand-pull inflation is most likely when there is full employment of resources, when AS is inelastic

Question 15

what does a demand-pull inflation diagram look like

Answer 15

AD/AS diagram, AD shifted to the right

Question 16

why is high inflation an economic problem

Answer 16

inequality for lower income families

falling real incomes

negative real interest rates - intrest rates are lower that inflation

higher cost of borrowing

risks of wage inflation, rising labour costs and lower profits

builds uncertainty, low confidence

Question 17

policies to control inflation

Answer 17

fiscal policy
monetary policy
supply side policies
direct controls - wages that government can control, control water bills