Inflation

Question 1

Macro policy of low and stable inflation

Answer 1

Create stability in overall equilibrium price level
Controlled by BoE
Target 2%

Question 2

CPI and RPI

Answer 2

Both measurements calculate the overall price level at different points in time
Calculate overall cost of a representative basket of goods and services

Question 3

Advantages of using price index to measure inflation

Answer 3

Large categories (legit)
Measurable/easy comparison

Question 4

Disadvantages of using price index to measure inflation

Answer 4

Uneven distribution (very few households represent the average)
Not fully representative
Differing spending patterns
Doesn’t reflect changing quality of goods and services
New products

Question 5

Inflation causes

Answer 5

Increased AD (demand pull inflation)
Decreased AS (cost push inflation)

Question 6

Inflation benefits

Answer 6

Low stable demand pull inflation may encourage firms to increase output
Allow firm to cut real wages and improve labour markets

Question 7

Inflation costs

Answer 7

Cost of reducing inflation
Boom and bust economic cycle
Decline in competitiveness (increase M decrease X)
Volatility and uncertainty (lower i lower EG)
Fall in value of savings and redistribution of income in society from savers to lenders and this with assets
Destabilise society and destroy confidence in the economic system

Question 8

Deflation causes

Answer 8

Decreased AD (demand push deflation)
Increased AS (cost pull inflation)

Question 9

Deflation benefits

Answer 9

Only beneficial when inflation rates have been really high

Question 10

Delation costs

Answer 10

Hold back on spending
Increased debts
Increased real costs of borrowing
Decreased profit margins
Decreased confidence and savings
Income distribution from debtors to creditors
X more competitive