Inflation 2.0 S2 L25

Question 1

UK inflation target

Answer 1

2% +/- 1

Question 2

Sources of inflation (2)

Answer 2

1. Demand shocks

2. Supply shocks

Question 3

Demand Shocks are

Answer 3

events that lead to unanticipated changes in aggregate expenditure

Question 4

Supply shocks

Answer 4

Unanticipated events that lead to firms changing their planned output levels

Question 5

Hyperinflation

Answer 5

Periods when inflation rates are very high, and often accelerating

Question 6

What tends to happen in periods of of hyperinflation

Answer 6

There tends to be a ‘flight from cash’ where people spend and hold as little cash as possible

Question 7

Nominal Interest Rate

Answer 7

1. The market interest rate

2. The annual percentage increase in the nominal value of a financial asset

Question 8

Real interest rate

Answer 8

1. Nominal interest rate minus the inflation rate

2. - The annual percentage increase in the purchasing power of a financial asset

Question 9

Real interest rate =

Answer 9

Nominal interest minus inflation rate

Question 10

Fisher Hypothesis

Answer 10

Higher inflation rate leads to similarly higher nominal interest rates