Inflation

Question 1

How do you calculate inflation using price index?

Answer 1

Price index X weight for each good

Add all goods up = basket of goods

Divide by 100 for 100 goods

Divide by 100 again for % of 1 good

Question 2

What are the limitations of using CPI to measure rate of inflation

Answer 2

• CPI measures the cost of living for an AVERAGE household - top and bottom 4% of income brackets are not included
• only 57% of households respond to survey and in response they may not give accurate answers
• when the quality of goods changes, the measure breaks down because it is not comparing like with like

Question 3

What is the difference between the Consumer Price Index and the Retail Price Index?

Answer 3

CPI excludes a number of different items relating to housing of which are all included in RPI.

E.g. mortgage nearest payments, council tax, buildings insurance etc.

Question 4

What does the RPI measure?

Answer 4

The average price of the typical ‘basket of goods’ bought by the average household - average consumer prices

Question 5

How do you calculate the CPI and the RPI?

Answer 5

Same data collected through monthly surveys

• prices recorded in 150 different areas of UK
• 110,000 proves are collected per month of a typical ‘basket of goods’
• 650 items included in basket
• RPI and CPI are weighted to reflect importance of different expenditures

Question 6

What are the three causes of inflation?

Answer 6

Demand pull
Cost push
Growth of money supply

Question 7

What is demand pull inflation?

Answer 7

Inflation which is caused by excess demand in the economy

Question 8

What is cost push inflation?

Answer 8

Inflation caused by increases in the costs of production in the economy

Question 9

How does the growth of money supply cause inflation? Quantities easing

Answer 9

People have more money, results on them spending more, as demand increases, price increases, inflation

(Demand pull inflation)

Question 10

What are the effects of inflation on the consumer?

Answer 10

• low income households effected the most
• may look to black markets where it’s cheaper
• export products
• less disposable income

Question 11

What are the effects of inflation on firms?

Answer 11

Have to increase prices which could reduce sales

Question 12

What are the effects of inflation to the government?

Answer 12

BofP worsens, we import more as it’s cheaper and export less as people don’t want to pay our high prices

Question 13

What are the defects of inflation on workers?

Answer 13

Wages may get cut as production costs for firms increases, people made redundant as firms can afford to keep as many staff