Inflation

Question 1

Defining inflation

Answer 1

A continuous and persistent increase in the aggregate price level as measured by changes in the CPI

Must my be a one off and must relate to all prices

Persistent uprise in P must be brought about by shifts in AS and AD

Question 2

Metrics

Answer 2

CPI - consumer price index
RPI- retail price index

Commodity prices
Food prices 
House prices 
Import prices 
Wages

Question 3

Costs of inflation

Answer 3

Redistribution-pensioners on fixed incomes lose

Uncertainty- impact on investment

Question 4

Benefits

Answer 4

Benefits

Some inflation inspires business confidence

Inflation accompanies gov spending which reduces unemployment

Question 5

Factors affecting inflation

Answer 5

Ad/AS shift

Structural (demand shift) caused by the expansion of some industries and the shrinking of others (e.g. Mining industry v financial services in U.K. )

Expectations (how optimistic or pessimistic people are about the state of the economy)

Question 6

Policies to tackle inflation

Answer 6

Demand side
Fiscal reducing public spending and increasing taxes

monetary - reducing money supply and increasing interest rates,thus making borrowing more expensive

Supply side policies- reducing union power, deregulating industry, privatising, encouraging R&D, training

Question 7

Phillips curve

Answer 7

Trade off between inflation and unemployment

Question 8

U.K. Rate

Answer 8

3 %

Question 9

U.K. Target

Answer 9

2%