Inflation

Question 1

Inflation

Answer 1

Continous rise in PL

Question 2

Inflation %=

Answer 2

(PL₂ - PL₁ /PL₁ ) x 100

Question 3

How CPI is constructed (3)

Answer 3

1. Creating a basket of goods representative of the average UK household
2. Collecting monthly price data for these items
3. Weighting each to calculate a standardized measure

Question 4

Quantity theory of money

Answer 4

In the LR an increase in the quantity of money brings= increase in PL

Question 5

Velocity of income

Answer 5

is the average amount of times per year a pound is used in transfers

Question 6

The quantity of money equation

Answer 6

MV=YP

or

P=Y/V*P

Question 7

Inflation rate=

(according to Quantity theory of money)

Answer 7

Money growth rate + Velocity growth rate - Real GDP growth rate

Question 8

Why are the other compnents of the QTM discounted in the LR when calculating inflation

Answer 8

They are factors that only excist in the SR

Question 9

4 costs of inflation

Answer 9

Shoe leather costs

Menu costs

Searching costs

Arbitrary costs

Question 10

Shoe leather costs are…

Answer 10

resources wasted when inflation encourages people to reduce money holdings

Question 11

Menu costs

Answer 11

Cost of changing prices

Question 12

Higher search costs

Answer 12

Constant price change requires monitoring

Question 13

Arbirary redistribtion of wealth

Answer 13

Redistribution of wealth and income