Inflation

Question 1

inflation

A MONETARY PHENOMENON

Answer 1

a sustained increase in the cost of living or general price level

leads to fall in purchasing power of money

Question 2

rate of inflation

Answer 2

measured by annual % change in consumer prices

2% using CPI ~ consumer price index

Question 3

deflation

Answer 3

sustained decrease in cost of living or prices, leading to a rise in the purchasing power of money

• bad cos consumers delay purchase of goods in expectation of further price fall
• lack of consumption = GDP doesn’t grow

Question 4

hyperinflation

Answer 4

sustained rise of inflations at very high levels every year

• caused by gov losing control of money supply
• too much printed money chasing too few goods can cause rapid price rise

Question 5

measuring inflation

Answer 5

• representative basket of goods, weights on each item ~ items we spend most on have higher % of weight in basket when we calculate CPI inflation

CALCULATE CPI INFLATION :

1. ( (e - s) / s ) x 100
2. (current price / base year price) x 100
3. current price x 100 = index number

Question 6

main causes of inflation

Answer 6

DEMAND PULL :
- rise in aggregate demand may lead to shortages in the short run. to ration demand, prices rise

COST PUSH :
- increase in costs of production is forcing suppliers to increase price ~ rising wage costs, raw material costs, import price

MONETARY INFLATION :
- if there is too much money made available, it leads to increase spending, and prices rise

Question 7

internal and external causes

Answer 7

INTERNAL :

• higher wages / labour costs
• boom in credit / money supply

EXTERNAL :

• increase in world oil / gas prices
• higher inflation in other countries

Question 8

consequences of inflation

Answer 8

WINNERS :

• workers with strong wage bargaining power will get wage rise when inflation is high (brain surgeon)
• debtors gain because it erodes debt value
• producers, if prices rise faster than costs

LOSERS :

• workers in low paid / replaceable jobs will struggle to get rise to meet inflation
• savers lose out of rate of inflation is higher than rate of interest on saving
• peeps on fixed income or benefits as they don’t have ability to earn more

Question 9

policies to control inflation : fiscal
( gov spending & taxing )

• quick
• not effective or targeting

Answer 9

• if total demand is too high, can tighten FP by reducing its own spending on public & merit goods or welfare payments
• raise direct taxes = reduction in disposable income ~ demand and output are lower = effect on jobs & EG in short term
• raise taxes = less money to spend ~ less money in economy

Question 10

policies to control inflation : supply side
( become more effective ~ improve and increase capacity )

• effective
• slow and expensive and boring

Answer 10

• increase productivity, competition and innovation can maintain lower prices

controlling inflation in medium term :

• reduction in company taxes to encourage greater investment
• reduction in taxes = increase risk taking and incentives to work
• polices to open a market to more competition to increase supply & lower prices

Question 11

policies to control inflation : monetary
( control of money supply & interest rates )

• effective
• slow

Answer 11

• tightening of MP involves BoE adding period of high IR to reduce consumer & investment spending
• higher IR may cause exchange rate to depreciate in value = fall in import cost and fall in export demand