Inflation 2.1.2 unit 34

Question 1

What is inflation?

Answer 1

It is a general rise in prices.

Question 2

What is deflation?

Answer 2

It is a fall in the price level.

Question 3

How do you measure the price level?

Answer 3

With a consumer price index and the retail price index..

Question 4

What are some causes of inflation?

Answer 4

It can be cause by either demand-pull inflation (inflation caused by excess demand in the economy) or cost-push inflation (inflation caused by by increase in costs of production in the economy.)

Question 5

What are some reasons for demand-pull inflation?

Answer 5

• Consumers spending may rise excessively.
• Firms may substantially increase there spending on investment.
• The government may increase its spending substantially.
• World demand for exports may rise.

Question 6

What are some reasons for cost-push inflation?

Answer 6

• Wages and salaries may increase.
• Imports may rise in price.
• Profits can be increased by raising prices so they may do this.
• Government could raise indirect taxes to reduce consumption or raise greater tax receipts.

Question 7

What are some costs of high inflation?

Answer 7

• Growth and unemployment.
• competitiveness, may decrease as imports become more expensive.
• Redistributional costs.
• Physiological and political costs.
• People are less likely to keep money in banks and invest into commodities.
• Menu costs.