Inflation

Question 1

Define inflation.

Answer 1

A general increase in prices and fall in the purchasing value of money.

Question 2

What is the government’s main target concerning inflation?

Answer 2

-Inflation should be no more than 1% either side of 2%.

Question 3

Define cost push inflation.

Answer 3

Where costs are pushed onto consumers.

Question 4

Define demand pull inflation.

Answer 4

Where there is excess demand from consumers.

Question 5

Name two ways with which we can measure inflation.

Answer 5

Retail Price Index & Consumer Price Index.

Question 6

How does the CPI work?

Answer 6

Measures changes in the price level of a market basket of consumer goods and services purchased by households.

This does not take mortgages into consideration.

Question 7

How does the RPI work?

Answer 7

The retail price index, or the RPI, shows the changes in the cost of living. It reflects the movement of prices in a range of goods and services used regularly, such as food, heating, housing, household goods, bus fares and petrol.

This takes mortgages and interest into account.

Question 8

List 5 problems of inflation.

Answer 8

• Balance of payments worsens
• Unemployment increases
• Value of the £ drops
• Money is worth less in real terms
• Prices become extortionate
• We lose competitiveness
• People purchase less
• Decrease in consumer/supplier confidence
• Higher inequality