Inflation

Question 1

What is inflation?

Answer 1

Inflation is the rate of increase in prices over a given period of time

Question 2

What is deflation?

Answer 2

Deflation is when prices keep going down

Question 3

What is disinflation?

Answer 3

Disinflation refers to a slowing in the rate of inflation

Question 4

Explain how CPI is calculated

Answer 4

The CPI is measured by looking at the change in price levels of a ‘typical basket’ of goods and services, such as food, transport and clothing, that people typically spend their money on

Question 5

Give 3 limitations of CPI as a measure of inflation

Answer 5

• the substitution bias
• the introduction of new items
• quality changes

Question 6

How often is CPI and RPI calculated?

Answer 6

every month

Question 7

Approximately many goods and services are in the basket?

Answer 7

750

Question 8

At approximately how many locations are price data taken?

Answer 8

150

Question 9

How often are weightings updated?

Answer 9

every year

Question 10

Explain the difference between CPI and RPI

Answer 10

• consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households
• the RPI includes some components that are not included in the CPI, such as housing components and mortgage interest payments

Question 11

Which is higher, RPI or CPI?

Answer 11

RPI

Question 12

What is CPIH?

Answer 12

the Consumer Prices Index including owner occupiers’ housing costs

Question 13

Explain what is meant by ‘cost push’ inflation

Answer 13

occurs when overall prices increase due to increases in the cost of wages and raw materials

Question 14

Give 3 possible causes of cost push inflation

Answer 14

an increase in the cost of raw materials, a rise in labor costs, or an increase in taxes

Question 15

Explain what is meant by ‘demand pull’ inflation

Answer 15

occurs when demand for goods and services exceeds supply in the economy

Question 16

Give 3 possible causes of demand pull inflation

Answer 16

money printing, government purchases, exchange rates, taxes, a growing economy, technology

Question 17

Explain how growth in the money supply can cause inflation

Answer 17

If the money supply grows too big relative to the size of an economy, the unit value of the currency diminishes

Question 18

Explain the effects of inflation on consumers/workers

Answer 18

For individuals, inflation will erode the real value of money. Real incomes will fall, as the purchasing power of incomes fall. So standard of living also falls. Inequality rises because the more skilled workers can negotiate nominal wage increases that keep pace or outstrip inflation

Question 19

Explain the effect of inflation on firms

Answer 19

costs of materials and products increase, and it may influence costs associated with trade. employees might seek higher wages, and these higher costs are transferred to consumers through higher prices

Question 20

Explain the effect of inflation on the government

Answer 20

High inflation can cause GDP growth to slowdown – leading to lower tax revenues & increased borrowing

Question 21

Explain possible benefits of inflation

Answer 21

allows for stable and appropriate wage increase, meaning consumers have more money to spend and invest in