Inflation and deflation

Question 1

inflation d

Answer 1

a sustained increase in the general price level

Question 2

deflation d

Answer 2

a fall in the general price level

Question 3

CPI ( consumer price index) d

Answer 3

the headline measure of inflation, derived from movements in a weighted basket of consumer goods over a 12-month period

Question 4

family expenditure survey d

Answer 4

a representative monthly survey of UK household expenditure used to derive changes in the consumer price index

Question 5

what is the most popular measure of inflation in the UK

Answer 5

CPI

Question 6

what is the government’s target for CPI inflation

Answer 6

2.0 % (+ / - 1 %)

Question 7

difference between CPI and RPI

Answer 7

CPI excludes a number of categories, notably housing costs

Question 8

how are the goods that are measured in the CPI chosen

Answer 8

using information from the family expenditure survey

Question 9

are all types of item weighted evenly in the CPI

Answer 9

no, the spending is divided into categories and weighted according to its importance

Question 10

what are the limitations of the CPI

Answer 10

different population groups experience different rates of inflation
CPI doesn’t include house prices
may be over-estimation because does not take into account quality improvements

Question 11

what are the two traditional ways of categorising the causes of inflation

Answer 11

demand-pull

cost-push

Question 12

cost-push inflation d

Answer 12

inflation caused by economy-wide increases in production costs

Question 13

indirect taxes d

Answer 13

taxes levied on spending on goods and services

Question 14

how do you show cost-pull inflation on a diagram

Answer 14

shift to the left of AS

Question 15

wage-price spiral d

Answer 15

process whereby increases in costs, such as wages, lead to increases in prices

Question 16

what are the sources of cost-push inflation

Answer 16

rise in cost of imported raw materials
rising labour costs
higher indirect taxes
wage-price spirals

Question 17

demand-pull inflation d

Answer 17

inflation resulting from too much demand in the economy, relative to supply capacity

Question 18

when is demand-pull inflation most likely to occur

Answer 18

when there is little spare capacity in the economy

Question 19

when does aggregate demand increase

Answer 19

when one or more of its components increases

Question 20

quantity theory of money d

Answer 20

the theory that increases in the money supply will lead to increases in the price level

Question 21

money supply d

Answer 21

the total amount of money in circulation or in existence in a country

Question 22

Fisher equation d

Answer 22

the mathematical identity MV = PY (or MV = PT)
M is money supply
V is velocity of circulation of money
P is the general price level
T is transactions in a year
Y is real value of national output

Question 23

velocity of circulation d

Answer 23

the number of times the money supply changes hands in a year

Question 24

hyperinflation d

Answer 24

very large, rapid increases in the general price level

Question 25

what is the notable thing about the Fisher equation

Answer 25

T and Y tend to increase slowly so are assumed to be constant
V and T (Y) are constant so money supply and price level are directly related

Question 26

what does hyperinflation indicate

Answer 26

an economy which is out of control

Question 27

talk about international competitiveness and inflation

Answer 27

if UK inflation is higher than competitors then UK goods and services will become less price competitive

Question 28

talk about the effect on investment of inflation

Answer 28

inflation creates uncertainty about future costs, revenues and profitability so investment levels fall

Question 29

talk about unanticipated inflation

Answer 29

leads to uncertainty and undermines investment

Question 30

anticipated inflation d

Answer 30

where economic agents correctly predict the future rate of inflation

Question 31

unanticipated inflation d

Answer 31

where economic agents do not accurately predict the future rate of inflation

Question 32

talk about inflation and the effect on distribution of income

Answer 32

inflation creates winners and losers, winners will be borrowers of money, losers will be savers with fixed returns

Question 33

talk about inflation and worsening industrial relations

Answer 33

strikes can be widespread during periods of inflation as workers feel they are losing out and push for higher pay

Question 34

fiscal drag d

Answer 34

increases in the burden of taxation when tax allowances are not increased in line with inflation

Question 35

explain fiscal drag

Answer 35

when people pay a higher percentage of their income in tax when there is inflation

Question 36

what is a way to reduce fiscal drag

Answer 36

increasing the tax-free allowance in line with inflation

Question 37

what value defines hyper inflation

Answer 37

inflation in excess of 1000% per year

Question 38

money illusion d

Answer 38

when economic agents fail to realise that changes in money values are not the same as changes in real values

Question 39

why can inflation be good

Answer 39

workers see rise in pay packets and firms see revenues increasing, could be money illusion but is preferable to no price increases

Question 40

benign deflation d

Answer 40

falling prices resulting from technological advances across the economy

Question 41

malevolent deflation d

Answer 41

falling prices resulting from a significant downturn in economic activity

Question 42

what are the 2 types of deflation

Answer 42

benign and malevolent