INFLATION Flashcards
WHAT IS INFLATION?
SUSTAINED RISE IN THE AVERAGE PRICE LEVEL OF GOODS AND SERVICES WHICH REDUCES THE PURCHASING POWER OF MONEY.
WHAT R THE WAYS OF MEASURING INFLATION?
- CPI
- RPI
WHEN IS CPI USED?
- VALUING STATE PENSIONS
- AS THE INFLATION TARGET
WHEN IS RPI USED?
- TO SET IR ON STUDENT LOANS
- FOR INDEX-LINKED GOVT BONDS
WHAT R THE DIFFERENCES BETWEEN CPI AND RPI?
- CPI INCLUDES ALL HOUSEHOLDS BUT RPI EXCLUDES TOP 4% OF EARNERS AND PENSIONERS
- RPI INCLUDES HOUSING COSTS BUT CPI DOESN’T
WHAT R THE PROBLEMS OF USING CPI AS A MEASURE OF INFLATION?
- DOESN’T INCLUDE HOUSING COSTS
- NOT REPRESENTATIVE OF THOSE WITH ATYPICAL SPENDING E.G NON CAR OWNERS
- SAMPLING PROBLEMS (ONLY 60% RESPOND TO SURVEY)
- TASTES AND FASHIONS CHANGE MORE QUIKCLY THAN ONCE A YR FOR THE BASKET
WHAT IS THE CURRENT TARGET LEVEL FOR INFLATION?
2%
WHAT IS A NOMINAL VALUE?
MONETARY VALUE NOT ADJUSTED FOR INFLATION.
WHAT IS A REAL VALUE?
MONETARY VALUE TAKING INTO ACCOINT INFLATION I.E A MEASURE OF PURCHASING POWER.
WHAT IS DEMAND PULL INFLATION?
INFLATION INITIATED BY MORE AD IN THE ECONOMY THAN CAN BE SUPPLIED AT EXISTING PRICES.
WHAT R EXAMPLES OF COST PUSH INFLATION?
- HIGHER MIN WAGE
- HIGHER INDIRECT TAXES
- INCREASED REGULATION
- LOWER SUPPLY OF COMMODITIES E.G DROUGHTS
WHAT R EXAMPLES OF DEMAND PULL INFLATION?
- WEALTH EFFECTS
- LOW TAXES
- LOW IR
- HIGHER CONFIDENCE
- POSITIVE TRADE BALANCE
WHAT IS COST PUSH INFLATION?
INFLATION INITIATED BY INCREASES IN COP TO PRODUCERS WHICH R PASSED TO CONSUMERS.
WHAT IS A WAGE PRICE SPIRAL?
HOW INFLATION CAN BECOME PERMANENT. PROCESS BY WHICH INCREASES IN WAGES LEADS TO INCREASES IN PRICES WHICH IN TURN LEADS TO INCREASES IN WAGES AND SO ON. CAN CREATE A POSITIVE OUTPUT GAP.
WHAT R THE COSTS TO FIRMS OF INFLATION?
- REDUCES CERTAINTY AND REDUCES MPI
- FORCED TO PAY HIGHER WAGES TO MAINTAIN WORKER’S REAL STANDARD OF LIVING
- MENU COSTS
- FALL IN EXPORTS
- HIGHER IR RAISING COSTS OF BORROWING
WHAT R MENU COSTS?
FIRMS HAVE TO SPEND ON CHANGING THEIR PROMOTIONAL MATERIAL E.G ADVERTS AND SPECIAL PRICING AS INFLATION WILL INCREASE THEIR COSTS AND LEADS TO THEM HAVING TO CHANGE PRICES.
WHAT R THE COSTS OF INFLATION TO CONSUMERS?
- ERODES PURCHASING POWER
- SHOE LEATHER COSTS
WHAT R SHOE LEVEL COSTS?
CONSUMERS WILL WASTE TIME LOOKING FOR A BARGAIN AS THEY MISTAKENLY BELIEVE THAT INDIVIDUAL FIRMS ARE PRICE GAUGING WHEN INSTEAD THE GENERAL PRICE LEVEL IS RISING.
WHAT R THE COSTS OF INFLATION FOR WORKERS?
- REDUNDANCY DUE TO HIGHER WAGE COSTS AND REDUCED CERTAINTY
- UNEMPLOYMENT DUE TO DECLINES IN DEMAND FOR UK GOODS.
WHAT R THE COSTS OF INFLATION FOR THE GOVT?
- BALANCE OF PAYMENTS DEFICIT
- UNEMPLOYMENT
- NEGATIVE IMPACT ON FISCAL DEFICIT
R THERE ANY POSITIVE IMPACTS OF INFLATION?
- ERODES VALUE OF DEBT
- REDUCES INEQUALITY AS THE WEALTHY ARE NET SAVERS AND THE LOW INCOME CONSUMERS ARE NET BORROWERS
WHAT IS DISINFLATION?
TERM USED TO DESCRIBE A DECLINEIN THE RATE OF INFLATION E.G FROM 5% TO 2%
WHAT IS DEFLATION?
WHEN OVERALL PRICE LEVEL FALLS TO NEGATIVES E.G FROM 5% TO -3%
WHAT PROBLEMS DOES DEFLATION CREATE?
- DEFLATIONARY SPIRAL
- INCREASES IN THE REAL VALUE OF DEBT
- NEGATIVE WEALTH EFFECTS
- LIQUIDITY TRAPS
