Inflation

Question 1

what is cost push inflation

Answer 1

an increase in the cost of factors of production like wages or resources

Question 2

which curve shifts in cost push inflation and where

Answer 2

SRAS inwards

Question 3

causes of cost push inflation

Answer 3

rise in wages
rising input costs like fuel
higher import prices
increased indirect taxes

Question 4

What are some benefits of low inflation

Answer 4

-increased business confidence
-increased consumer confidence
-maintaining competitiveness of UK exports

Question 5

What are some costs of high inflation?

Answer 5

-decreased tax revenue
-decreased consumer confidence
-decreased business confidence
-difficult business planning
-loss of international competitiveness

Question 6

what is demand pull inflation

Answer 6

where excessive growth in AD outstrips the economy’s ability to produce goods and services

Question 7

which curve shifts in demand pull inflation

Answer 7

the AD curve shifts right without a shift in SRAS resulting in a higher price level

Question 8

what is inflation

Answer 8

persistent or sustained increases in average price level over a period of time causing the value of money to decrease

Question 9

what is the UK’s inflation target

Answer 9

2%

Question 10

causes of demand pull inflation

Answer 10

-consumption rises too much e.g due to tax cuts
-investment rises too much e.g corporation taxes are cut
-rapid rise in exports e.g increase in demand of exports
-positive wealth effect/over-confidence
-too much government spending

Question 11

how do you calculate CPI (Consumer Price Index)?

Answer 11

1. The Office of National Statistics (ONS) uses a basket of around 700 goods and services bought by the average household
2. A monthly price survey of the goods and services bought is undertaken - called the Family Expenditure Survey
3. A weighted average price index is calculated - each price in the index is given a weighting according to the proportion of average household income spent in each item

Question 12

Why is the basket of 700 good and services used to calculate CPI regularly updated

Answer 12

-development of new products
-changing consumer tastes
-consumers switching purchasing patterns due to price changes

Question 13

what is the phillips curve

Answer 13

an inverse relationship between unemployment and inflation

Question 14

what does the phillips curve look like

Answer 14

the reflection of the keynesian LRAS curve

Question 15

what does the phillips curve state

long step by step answer

Answer 15

1. when unemployment is high, inflationary pressures in an economy tend to be weak
2. a significant fall in unemployment may not cause much of a rise in inflation - spare capacity is being used up and rising employment often means efficient use of the factors of production
3. as unemployment falls further, especially cyclical unemployment, then wage pressures and price pressures begin to accelerate
4. as unemployment falls to low levels the risk of a significant increases in inflation goes up. At this stage the output gap is likely to be positive and the factors of production are experiencing shortages
5. the can lead to wage inflation which leads to a faster rise in consumer prices hence the inverse relationship between unemployment and inflation
6. the trade-off between jobs and prices has become unfavourable. when inflation is accelerating typically the central bank will start a tightening monetary policy by raising interest rates