Inflation S2 L25

Question 1

Inflation

Answer 1

An increase in the overall level of prices

Question 2

Price level

Answer 2

The average level of prices and the value of money

Question 3

Deflation

Answer 3

A persistently falling price level

Question 4

Inflation rate

Answer 4

The percentage change in the price level from the previous period

Question 5

Demand-pull inflation

Answer 5

When the demand for G&S is higher when compared to the production capacity

Question 6

Cost-pull inflation

Answer 6

It occurs when the cost of production increases.

Question 7

A rise of inflation means …

Answer 7

A faster increase in prices

Question 8

A fall in inflation means …

Answer 8

A slower increase in prices (but still an increase in the average level of prices)

Question 9

Built-in Inflation

Answer 9

A rise in prices results in higher wages to afford the increased cost of living. Therefore, high wages result in increased cost of production, which in turn has an impact on product pricing. The circle hence continues

Question 10

Unpredictable inflation or deflation is a problem because … (4 points)

Answer 10

1. Redistributes income
2. Redistributes wealth
3. Lower real GDP and employment
4. Diverts resources from production

Question 11

Inflation rate

Answer 11

The annual percentage rate of increase in the average price level

Question 12

CPI

Answer 12

Consumer price index

Question 13

CPI measures

Answer 13

The average of the prices paid by consumers for a “fixed” basket of consumer goods and services

Question 14

The ….. .. ……. ……… reports the CPI each month

Answer 14

The Office of National Statistics

Question 15

Constructing the CPI involves 3 stages …

Answer 15

1. Selecting the CPI basket
2. Conducting a monthly price survey
3. Calculating the CPI

Question 16

Measuring the cost of living involves… (3)

Answer 16

1. Find the cost of the CPI basket at base-period
2. Find the cost of CPI basket at current prices
3. Calculate the CPI for the current period

Question 17

CPI formula

Answer 17

(Cost of baskets at current period/ Cost of basket at base period) x 100

Question 18

CPI might overstate true inflation due to… (4)

Answer 18

1. Quality change bias
2. Commodity substation bias
3. Outlet substitution bias
4. New goods bias

Question 19

New goods bias

Answer 19

New goods that weren’t available in the base year appear

Question 20

Quality change bias

Answer 20

-Quality improvements occur every year. Part of the rise in price is payment for improved quality and not inflation

Question 21

Commodity substation bias

Answer 21

The market basket of goods used in calculating the CPI is fixed and does not take into account consumers’ substitution away from goods whose relatives price increases

Question 22

Outlet substitution bias

Answer 22

As the structure of retailing changes, people switch to buying from cheaper sources, but CPI doesn’t take this into account

Question 23

Hyperinflation

Answer 23

Very high, typically accelerating inflation

Question 24

Core inflation rate

Answer 24

CPI inflation excluding the volatile elements (food and fuel)