Inflation (MAC)

Question 1

What is inflation?

Answer 1

It is a sustained rise in the general price level.

Question 2

What is deflation?

Answer 2

It is a sustained fall in the general price level.

Question 3

What is disinflation?

Answer 3

It is a fall in the rate at which the general price level is rising.

Question 4

What is the consumer price index?

Answer 4

The measure of inflation which is used for inflation targeting. It does not include housing costs. It is also used to make international comparisons of inflation rates.

Question 5

How to calculate the rate of inflation?

Answer 5

Change in inflation / Original inflation x 100

Question 6

What is an index number?

Answer 6

An index number is a number shown relative to another number in percentage terms.

Question 7

What is a base year?

Answer 7

It is used to compare price levels in different time periods. It is given the number 100.

Question 8

What are weights?

Answer 8

Show the proportion of income spent on items. They are used to ensure that the percentage change in price reflects the impact on the average family in terms of their spending.

Question 9

What is the formula of CPI?

Answer 9

cost of market basket in a given year / cost of market basket in the base year x 100

Question 10

What are the limitations of CPI as a measure of the rate of inflation?

Answer 10

It does not include housing costs

Some people do not have representative spending patterns

Attempts are made to take account of changes in quality or weight of goods but inevitably these adjustments may be imprecise

Sudden changes are not reflected in CPI

There are sampling issues

Question 11

What are the causes of inflation?

Answer 11

Demand Pull Inflation: Caused by a rise in aggragate demand so people spend more.

Cost push inflation: This occurs when aggragate supply decreases which will lead to a rise in the price level

Question 12

What are the causes of demand pull inflation?

Answer 12

Decrease in interest rates

A rise in the level of business and consumer confidence

An increase in government spending

Exports rising relative to imports

Depreciation of the exchange

Question 13

What are causes of cost push inflation?

Answer 13

A rise in oil prices and/or raw material prices

A fall in the exchange rate

A rise in taxes on businesses

An increase in the minimum wage or wages generally

Increased regulations

Question 14

What is monetarism?

Answer 14

It is the school of economics based on the belief that inflation is always a problem of too much money in the economy

Question 15

What are the effects of inflation for consumers?

Answer 15

For those on fixed incomes: their incomes would fall in real terms

For those with savings: If the rate of inflation is higher than the interest rate on savings, the real value of savings will decrease

For those with loans or mortgages: if the rate of inflation is higher than the interest rate on loans the real value of those loans will fall

Question 16

What are the effects of inflation for firms?

Answer 16

Fall in exports

Uncertainty

Lower profits

Question 17

What are the effects of inflation for governments?

Answer 17

Fall in the real value of national debt

Increased inequality

Deterioration in the balance of trade

Question 18

What are the effects of inflation for workers?

Answer 18

For those in a weak bargaining position:

If inflation is rising at a faster rate than wage increases, workers become progressively worse off, even if in nominal terms their wages have increased. However if wages rise faster than inflation then real incomes rise

Unemployment

Question 19

What are real terms?

Answer 19

Refers to a value that has been adjusted to take the effects of inflation into account.

Question 20

What is international competitiveness?

Answer 20

It is the degree to which a countrys goods and services can be sold on international markets.