Inflation

Question 1

Define inflation

Answer 1

sustained increase in the general price level in an economy

Question 2

Define deflation

Answer 2

price level has fallen. Inflation rate is negative

Question 3

Define disinfation

Answer 3

the price level is rising but at a slower rate than before

Question 4

Define hyperinflation

Answer 4

when inflation spirals out of control

Question 5

what is the consumer price index

Answer 5

measures inflation. Select a base year and give it a value of 100. Using family expenditure survey select the most common products (about 650). Attach weights to each product, these get revised every year. multiply new price index for each product to find change in price level.

Question 6

What is demand pull inflation

Answer 6

inflation occurring from an excessive growth in AD

Question 7

What is cost push inflation

Answer 7

inflation occurring from an increase in the costs of producing goods and services in the economy

Question 8

What can cause demand pull inflation

Answer 8

high consumer spending, increased demand for exports, shortages due to lack of capacity, too much money circulating in the economy. Consumer/business confidence could increase, reduction in income taxes, low interest rates, Fall in value of pound.

Question 9

How can high consumer spending/too much money in the economy cause demand pull inflation

Answer 9

consumer/business confidence is high. Inclined to spend more. Supply unable to keep up. Firms are facing excess demand and put their prices up. More loans given out so more money to spend, excess demand so prices increase.

Question 10

What can cause cost push inflation

Answer 10

wage levels may increase, rise in cost of imported raw materials and government decisions, high interest rates, reduction in C and increase in indirect tax.

Question 11

Why does increase in wage level cause cost push

Answer 11

increase n costs to business of employing workers, businesses may raise prices.

Question 12

Why does increase in cost of imported raw materials cause cost push

Answer 12

if prices rise then businesses will pass extra cost to customers. Second likely cause is fall in value of our currency, UK businesses need to pay more to import materials.

Question 13

Why does government decisions cause cost push

Answer 13

Might increase indirect taxes. Might introduce regulations that might make it more expensive for businesses.

Question 14

What does demand pull inflation cause

Answer 14

AD shifts right, no change in AS. More consumers and businesses spend more money but no increase in supply. PL and Y increase.

Question 15

what does cost push inflation cause

Answer 15

AS shifted left. No change in AD.

Question 16

cost push inflation and falling AD

Answer 16

Big surge in cost of imports, real GDP/employment levels take a hammering, fall in confidence

Question 17

demand pull inflation and cost push inflation

Answer 17

cuts income tax

Question 18

increased AS and demand pull inflation

Answer 18

cost of imported raw materials falls significantly, reduction in income tax, deregulation of the economy

Question 19

demand pull inflation and increased AS

Answer 19

decrease in interest rates, real GDP and employment has increased, higher price level

Question 20

why is controlled inflation good

Answer 20

its a necessary part of a growing economy

Question 21

what can inflation cause when an economy is operating at full economy

Answer 21

can lead to hyperinflation. PL increases but Y doesn’t.

Question 22

why can inflation be good

Answer 22

reduces the true value of national debt. Good for borrowers and bad for lenders.

Question 23

What can cause deflation

Answer 23

AD shift left/ AS shift right. long recession, excessive space capacity or supply side events

Question 24

What is bad about deflation

Answer 24

consumers may postpone demand, real value of debt rises, cost o borrowing increases, falling asset prices hit personal sector, low profit margins

Question 25

How can devaluation cause inflation

Answer 25

increased imports cost

Question 26

How can inflationary expectation cause inflation

Answer 26

high inflation expectations cause workers to demand wage increase and firms to push up prices

Question 27

Explain income redistribution as a consequence of inflation

Answer 27

High inflation has regressive effects on lower income families and older people. Prices for basics increases

Question 28

Explain falling RDI as a consequence of inflation

Answer 28

wage levels usually don’t keep pace with rising price levels

Question 29

Explain negative real interest rates as a consequence of inflation

Answer 29

if interest rates on savings accounts are lower then the rate of inflation, then people who rely on interest from their savings will be poorer

Question 30

Explain the cost of borrowing as a consequence of inflation

Answer 30

high inflation may lead to higher borrowing costs as financial markets protect themselves against rising prices and increase the cost of borrowing

Question 31

Explain high government spending on welfare as a consequence of inflation

Answer 31

needed to keep up higher price levels as price of basics has increased

Question 32

Explain risk of wage inflation as a consequence of inflation

Answer 32

high inflation can lead to an increase in pay claims as people look to protect their real incomes. This can lead to a rise in unit labour costs and lower profits for businesses

Question 33

Explain business competitiveness as a consequence of inflation

Answer 33

If one country has a much higher rate of inflation than others for a considerable period of time, this will make its exports less price competitive in world markets

Question 34

Explain business uncertainty as a consequence of inflation

Answer 34

high and volatile inflation is bad for business confidence partly because they cannot be sure of what their costs and prices are likely to be. This might lead to lower levels of I.

Question 35

Consequence of deflation: discourages consumer spending

Answer 35

AD will fall. People expect that prices will fall further so they wont spend now

Question 36

Consequence of deflation: real wage unemployment

Answer 36

due to sticky wages (rate at which no one will work for less) real wages may actually increase. However, businesses don’t want to pay higher real wages so unemployment rises

Question 37

What are the other consequences of deflation

Answer 37

1. Increased real value of debt
2. Increased real interest rates
3. Can become entrenched and difficult to end

Question 38

How to evaluate inflation

Answer 38

1. Size of inflation
2. Depends on duration
3. Type of inflation
4. Overseas comparisons (higher compared to others then less competitive exports)
5. Econoy’s position
6. Depends on the reliability of the data