Inflation

Question 1

what is inflation

Answer 1

rate of change of average price level over time

Question 2

why is inflation important?

Answer 2

• important to understand why prices of goods/services rise
• if prices rise but wages remain constant - consumers are worse of in real terms - less disposable income to spend

Question 3

How is inflation measured

Answer 3

Consumer Price Index
Retail Price Index - includes housing components, mortgage interests unlike CPI

Question 4

What causes inflation?

Answer 4

Demand-pull
Cost-push

Question 5

what is demand-pull

Answer 5

there is excessive demand for goods and services, there is pressure on resources. Firms increase there prices to earn more profit, when resources are fully employed
* right shift in demand

Question 6

What is cost-push

Answer 6

Rising cost of production means firms increase their prices to protect profit margins
* left shift in supply

Question 7

Causes of demand-pull inflation[4]

Answer 7

• weak exchange rate - more export - AD rises
• lower taxes or more gov.t spending - more disposable income
• low interest rates - less borrowing + more spending
• economic growth in other countries - increase demand for UK exports

Question 8

Causes of cost - push inflation[4]

Answer 8

• increased wages - rise of price - workers demand more wage > lead to wage - price spiral
• High commodity prices - if scarce and in demand - may rise in price
• weak exchange rate - import becomes expensive for firms - higher cost for production
• monopolies - use their dominant market position to exploit consumers with higher prices

Question 9

What is deflation

Answer 9

when the average price level is still
rising, but to a slower rate - price levels are falling

Question 10

Problems of deflation[2]

Answer 10

• value of money rises - less spending by consumers as goods’services - cheap
• results in consumption to decrease significantly - firms lose their confidence to invest

Question 11

Why is high inflation a problem?[4]

Answer 11

-Inequality > low income families
- costs of borrowing > high interest rates
- Income falls > while prices rise
- Business uncertainty > low confidence - lead to fall in capital investment

Question 12

What policies can be used to control inflation?[4]

Answer 12

-fiscal policies
- monetary policy
-Supply side policies
- Direct controls