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Economics REVISION 2 (Macro) > Inflation > Flashcards

Inflation Flashcards

1
Q

What is inflation

A

A sustained increase in the cost of living or the general price level leading to a fall in the purchasing power of money

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2
Q

How is the rate of inflation measured

A

Annual % change in consumer prices

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3
Q

What is the uk government’s inflation target

A

2%

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4
Q

Who helps control inflation rates

A

The Bank of England sets monetary policy interest rates so that inflationary pressures are controlled and the inflation target is reached

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5
Q

What is deflation

A

Rate of inflation is negative

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6
Q

What is disinflation

A

Fall in the rate of inflation

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7
Q

What is hyper-inflation

A

A period of very high rates of inflation, usually leading to a loss of confidence in an economy’s currency

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8
Q

What is the inflation rate

A

The annual rate of change of the average price of goods and services

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9
Q

What are unit labour costs

A

They reflect labour costs, including social security and employers’ pension contributions, and including the costs of self-employed labour, incurred in the production of s unit of economic output

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10
Q

What is the consumer price index

A

A measure of the price level based on the prices of a collection of products designed to reflect the consumption basket of the average consumer

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11
Q

How is the rate of inflation calculated (CPI)

A
  • a base year is selected and an expenditure survey carried out
  • basket of goods (weights attached to each item based on their importance)
  • weights are multiplied by brand changes
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12
Q

How many people do they base year survey for CPI

A

40,000

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13
Q

How do you calculate the price index for a year

A

Sum of (price x weight) / sum of the weights

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14
Q

Limitations of the CPI as a measure of inflation

A
  • not representative of ‘non-typical’ households
  • some people have different spending patterns
  • changing quality of goods and services
  • new produced each year
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15
Q

What changes yearly with the CPI

A

The basket of goods - to represent changes in preferences and needs

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16
Q

CPI rates U.K.

A

Increasing over time

17
Q

What are the main causes of inflation

A
  • demand and supply sides

- internal and external events

18
Q

Internal and external causes of inflation

A
  • domestic economy (e.g. rise in VAT)

- external sources (e.g. rise in commodities)

19
Q

When does demand pull inflation occur

A

When aggregate demand is growing at an unsustainable rate = increased pressure on scarce resources and a positive output gap

20
Q

When does demand pull inflation become a threat

A

When an economy has experienced a boom with GDP rising faster than the long-run trend growth of potential GDP

21
Q

When is demand pull inflation likely to occur

A

When there is full employment of resources and SRAS is inelastic

22
Q

What are the main causes of demand pull inflation

A
  • depreciation of the XR
  • higher demand from fiscal stimulus
  • monetary stimulus
  • fast growth in other countries
23
Q

How does a depreciation of the XR create demand pull inflation

A

Increases the price of exports and reduced the foreign price of a country’s exports. If consumers buy fewer imports, while exports grow, AD in will rise - and there may be a multiplier effect on the level of demand and output

24
Q

When does cost-push inflation occur

A

When businesses respond to rising costs, by increasing pricing to protect their profit margins

25
Q

Why might costs for businesses rise (causing cost-push inflation)

A
  • component costs
  • rising labour costs
  • expectations of inflation
  • higher indirect taxes
  • fall in the XR
  • monopoly employers / profit-push inflation
26
Q

Expectations of inflation

A
  • difficult to remove once established
  • most people will raise their inflation expectations and build it into their decisions
  • increase in inflation expectations
27
Q

What are internal causes of inflation

A
  • surge in property prices
  • higher wages / cost of labour
  • book in credit / money supply
  • rise in business taxes
28
Q

What are the external causes of inflation

A
  • increase in world oil / gas prices
  • inflation in global commodity prices
  • depreciation of the XR
  • high inflation in other countries
29
Q

Consequences of inflation for consumers, business, the government and workers

A
  • income redistribution
  • falling real income
  • negative real interest rates
  • cost of borrowing
  • risks of wage inflation
  • business competitiveness
  • business uncertainty
30
Q

Winners of inflation

A
  • workers with strong wage bargaining power
  • senators if real interest rates are negative
  • producers if prices rise faster than costs
31
Q

Losers of high inflation

A
  • retired on fixed incomes
  • lenders if real interest rates are negative
  • savers if real returns are negative
  • workers in low paid jobs
32
Q

Why is the rate of inflation difficult to forecast accurately

A
  • volatile global energy prices
  • changes in value of the currency
  • uncertain growth of AD
  • volatile food prices
  • government indirect taxes can change
33
Q

How can inflation be reduced

A

Policies that slow AD or boost AS

34
Q

How can fiscal policy help reduce inflation

A

Tighten fiscal policy

  • reducing spending on public and merit goods or welfare payments
  • raise direct taxes
35
Q

How can monetary policy reduce inflation

A

Tightening of monetary policy
-higher interest rates
(May cause the XR to appreciate in value)

36
Q

How can supply side policies reduce inflation

A

Increase productivity, competition and innovation - all of which maintain lower prices

37
Q

How can direct controls reduce inflation

A

Controls on some prices and wages

38
Q

What is the best way to control inflation in the short term

A

For the government and the central bank to keep control of AD to a level consistent with out productive capacity

39
Q

When is controlling demand to limit inflation likely to be ineffective in the short run

A

If the main causes are due to external shocks such as high world good and energy prices

Economics REVISION 2 (Macro) (37 decks)

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