Inflation/Deflation

Question 1

What is the target rate for inflation in the UK?

Answer 1

2%

Question 2

What is the acceptable range of inflation?

Answer 2

1-3%

Question 3

Who manages inflation in the UK?

Answer 3

The Bank of England

Question 4

What are the measures of inflation?

Answer 4

CPI
RPI

Question 5

What is CPI?

Answer 5

Consumer Price Index

Question 6

How to calculate inflation with CPI?

Answer 6

Select a base year
A food and expenditure survey of 40,000 households
As a result, a basket of goods and services is created (700 of the most popular)
Each good receives a weighting of importance
Prices of these goods are tracked

Question 7

Equation of CPI

Answer 7

Weight*Price change

Question 8

What are the limitations of CPI?

Answer 8

Not fully representing
Slow to respond to change
Changes in Quality
Doesn’t include all costs

Question 9

What’s inflation?

Answer 9

A sustained rise in the general price level or a fall in purchasing power.

Question 10

What’s deflation?

Answer 10

A sustained fall in the general price level or a rise in purchasing power.

Question 11

What’s disinflation?

Answer 11

A fall in rate of inflation while inflation is still positive

Question 12

What is the inflation rate?

Answer 12

The percentage rise in price level over a year

Question 13

What are the types of inflation?

Answer 13

Cost - Push Inflation
Demand-Pull Inflation

Question 14

What is Cost-push inflation?

Answer 14

A rise in average prices caused by increased in firms’ costs.

Question 15

What is Demand - Pull inflation?

Answer 15

When AD exceeds AS, there is a rise in prices as there is too much money chasing so few goods

Question 16

What are the causes of Cost - Push Inflation?

Answer 16

Imported raw products; inflation in exporting country or fall in the value of importing country currency.

Increased Labour costs - TU action or MW increases

A rise in Indirect Tax rates - eg. VAT

Wage price spiral - workers demand wages inline with inflation

Question 17

What are examples of Cost-Push inflation?

Answer 17

Increasing world oil prices
Depreciating exchange rates

Question 18

What are examples of Demand - Pull inflation?

Answer 18

Rising property prices
Rapid expansion of credit from banks

Question 19

What are the consequences of Inflation?
To consumers

Answer 19

Reduced purchasing power (Unless nominal wage rises faster)
Savings lose their value
Purchasing of Expensive products
Distribution of wealth from savers to borrowers.
Increased cost of variable interest borrowing - eg mortgages

Question 20

What are the consequences of Inflation?
To firms

Answer 20

Rising costs
Investment falls as business confidence falls
Increased profitablity

Question 21

What are the consequences of Inflation?
To the economy

Answer 21

TU unrest
Fiscal drag
Rising Interest rates - increased cost of borrowing leading to less investment and growth
Less consumption
International competitiveness falls

Question 22

What’s hyperinflation?

Answer 22

Inflation exceeds 1000%

Question 23

What are problems related to inflation?

Answer 23

Menu costs
Shoe - leather costs

Question 24

What is deflation?

Answer 24

general decline in prices for goods and services

Question 25

What are types of deflation?

Answer 25

Benign
Malevont

Question 26

What is Benign (good) deflation?

Answer 26

An increase in aggregate supply, primarily as a result of technological advancement.

Question 27

What is malevont (good) deflation?

Answer 27

Fall in prices due to a significant fall in economic activity

Question 28

What are examples of deflation?

Answer 28

Tech Sector
Agricultural Sector