Inflation Definitions

Question 1

Inflation (2)

Answer 1

• A general and persistent rise in the price level
• And a fall in the purchasing power of money

Question 2

Deflation (3)

Answer 2

• This is when the rate of inflation becomes negative
• ie. the general price level is falling
• And the value of money is rising

Question 3

Disinflation (3)

Answer 3

• This describes a fall in the inflation rate
• Which is still positive
• This means that prices are still rising, just less quickly

Question 4

Inflation rate (2)

Answer 4

• The percentage increase in the general price level
• Usually measured as a yearly comparison

Question 5

Inflation Target (3)

Answer 5

• The UK inflation target is 2%
• (1+ or -1%)
• According to the CPI measure of inflation

Question 6

Price Survey (4)

Answer 6

• The ONS survey the price of around 700 items each month
• Many from different places, so 180,000 prices are collected in total
• From 20,000 shops and online
• Prices data is collected monthly

Question 7

CPI (5)

Consumer Price Index

Answer 7

• This is the official measure of inflation
• It measures the price level of a representative basket of goods and services
• Individual items are weighted
• And constructed into an index using a geometric mean
• The CPI does not include housing costs within the index

Question 8

RPI (4)

Answer 8

• This was the official inflation index before CPI and is measured using broadly the same approach
• The RPI includes a range of housing costs
• And is constructed into an index using an arithmetic mean
• The RPI is typically higher than the CPI

Question 9

Menu costs (2)

Answer 9

• Are the cost to a firm resulting from changing prices required when inflation exists
• The name stems from the cost of restaurants literally printing new menus, but economists use it to refer to the cost of changing nominal prices in general

Question 10

Shoe leather costs (2)

Answer 10

• Are the costs that refer to the opportunity cost of time and energy that people spend trying to counter-act the effects of inflation
• Such as having to make additional trips to the bank because they need to hold more cash or searching for longer to check prices

Question 11

Cost push inflation (3)

Answer 11

• This is caused by an increase in prices of inputs
• For example the increasing cost of labour or raw materials or oil
• It is shown as a left shift in AS (Aggregate supply)

Question 12

Demand pull inflation (2)

Answer 12

• This is caued when aggregate demand in an economy outpaces aggregate supply
• For example, demand pull inflation could be caused by increasing C or I or G or (X-M)

Question 13

Quantity theory of money (3)

Answer 13

• This theory proposes a positive relationship between changes in the money supply and the long-term prices of goods
• It states that increasing the money supply in the economy will eventually lead to an equal percentage rise in the prices of goods and services
• Based on Equation MV = PY

Question 14

Define an Index

Answer 14

• A statistical aggregate
• That measures change in economy in data
• With a base year usually repesented by the number 100