Inflation/Deflation

Question 1

Inflation

Answer 1

Inflation is a sustained increase in the general price level.

Question 2

Hyperinflation

Answer 2

Occurs when inflation rises above 50%.

Question 3

Which of the following is likely to happen following a reduction in business and investor confidence?

Answer 3

A reduction in business and investor confidence causes a reduction in investment which will reduce AD and shift the AD curve to the left. This leads to a reduction in real GDP and a reduction in the price level.

Question 4

Deflation

Answer 4

Deflation is a sustained fall in the general price level.

Question 5

Whats the first step in calculating the UK’s price level

Answer 5

Stage 1 - the Office of National Statistics conducts its Living Costs and Food Survey. This involves interviewing 7000 households to find the 650 most common goods and services and to find the percentage of their spending goes on each of these goods and services.

Question 6

Whats the second step in calculating the UK’s price level

Answer 6

Stage 2 - the ONS conducts a price survey where they collect prices of these 650 goods from across the UK in order to find the average price of each good.

Question 7

Whats the third step in calculating the UK’s price level

Answer 7

Stage 3 - a weighted average of all the prices is calculated in order to find the price level.

Question 8

Explain the three stages to calculating the UK’s price level.

Answer 8

Stage 1 - the Office of National Statistics conducts its Living Costs and Food Survey. This involves interviewing 7000 households to find the 650 most common goods and services and to find the percentage of their spending goes on each of these goods and services.

Stage 2 - the ONS conducts a price survey where they collect prices of these 650 goods from across the UK in order to find the average price of each good.

Stage 3 - a weighted average of all the prices is calculated in order to find the price level.

Question 9

Disinflation

Answer 9

Disinflation is when the inflation rate is positive but decreasing.

Question 10

Subsidy

Answer 10

A subsidy is a grant from the government to a firm to increase the supply of a good.

Question 11

Problems with measuring inflation through cpi?

Answer 11

• Time lag
• Changes in quality
• Unusual spending habits
• No mortgage

Question 12

Difference between RPI and CPI

Answer 12

The major difference between the two measures, is that CPI calculations excludes payments on mortgage interest (It’s thought that by excluding mortgages, the CPI is a better measure of the impact of macroeconomic policy

Question 13

Wage price spiral

Answer 13

A situation where workers bid for higher wages because they have seen their real income eroded by rising prices. This can lead to a further burst of cost-push inflation in an economy

Question 14

Nominal wage

Answer 14

Nominal wage is the worker’s take home pay. the real wage shows the amount that someone can actually buy with their nominal wage as it takes inflation into account. Inflation means that the value of money falls as it can be used to purchase fewer goods and so real wage will decrease.

Question 15

How can high inflation reduce inequality

Answer 15

High inflation tends to benefit borrowers who are usually the poor. It makes savers, who are usually the rich, worse off. This reduces inequality