lesson 9

Question 1

when we have reflationary growth…

Answer 1

we have a lot of spare capacity so there is no inflation actually associated with this actual growth
lower interest rates
increased government spending
increased taxes

Question 2

when we have inflationary growth there is…

Answer 2

supply constraints

Question 3

when we have spare capacity there is…

Answer 3

increased unemployment
lack of demand so we have to stimulate it with expansionary policies

Question 4

what are the three rates of inflation?

Answer 4

creeping
accelerating
hyperinflation

Question 5

four reasons for inflation

Answer 5

cost push
demand pull
too much money
imported inflation (weak currency)

Question 6

when do we have a wage squeeze?

Answer 6

when the wages may be rising but not as fast as the bills so essentially we are getting poorer

Question 7

what can a weak pound result in?

Answer 7

rising importing prices

Question 8

what are the four reasons for demand pull inflation?

Answer 8

a consumer boom
increase in government spending
an increase in net exports
money supply grow

Question 9

in terms of demand pull inflation what does a consumer boom mean?

Answer 9

confidence is high for the future so households increase their spending. there is high AD so firms are competing for resources so costs drive up and in turn so does prices

Question 10

in terms of demand pull inflation what does an increase in government spending do?

Answer 10

government spending increases to raise economic output

Question 11

in terms of demand pull inflation what does an increase in net exports do?

Answer 11

it may cause inflation if the economy is using nearly all of its resources

Question 12

in terms of demand pull inflation if our money supply is growing faster than our output what does it mean?

Answer 12

there is an increase in the money supply which directly increases prices. there is excessive growth of the money supply increasing AD which would increase output in the short run but in the long run it will lead to demand pull inflation

Question 13

what is cost push inflation?

Answer 13

when costs increase but is not associated with Yfe, demand or supply constraints

Question 14

oil prices are rising and they are priced in $, what does this mean for us as British importers?

Answer 14

if the £ is weakening then that means we are paying more for oil.

Question 15

what does rising production costs do to producers?

Answer 15

discourages them

Question 16

rising costs as a result of supply constraints is what type of inflation?

Answer 16

demand pull inflation

Question 17

rising costs for reasons not associated with supply constraints, Yfe or demand is what type of inflation?

Answer 17

cost push inflation

Question 18

rising costs as a result of rising import prices is what type of inflation?

Answer 18

imported inflation

Question 19

how can the economy grow without causing a rise in inflation?

Answer 19

create new capacity to boost LRAS

use up spare capacity

Question 20

explain why higher prices and lower wage growth is a concern to policy makers.

Answer 20

it can lead to a fall in wages which is going to result in lower living standards due to the wage squeeze people will be poorer

Question 21

explain the monetarist view of inflation.

Answer 21

an increase in the supply of money has a direct and positive relationship with an increase in price

Question 22

four policies the government might use when there is spare capacity in the economy.

Answer 22

increase government spending

decrease tax rates

decrease interest rates

QE

Question 23

five policies the government might use when there is spare capacity in the economy.

Answer 23

decrease government spending

increase tax rates

increase interest rates

education/ training

firms investing

Question 24

what are the 5 troubles with inflation?

Answer 24

1. basic costs - businesses will have to change things like menus which can be a hassle
2. wage squeeze - wages are rising slower in comparison to the rate of inflation
3. wage price spiral - workers lose spending power, causing them to push for higher wages which raises costs for firms resulting in more inflation
4. inflationary noise - confused consumers, falling consumption leading to falling investment
5. international competitiveness - if our inflation is higher than our competitors our international competitiveness falls

Question 25

what is the definition of deflation?

Answer 25

the sustained fall in the general price level

Question 26

what is malign deflation caused by and its definition?

Answer 26

fall in AD and is bad news

its the sustained fall in price level, output and employment caused by a steep and persistent fall in AD

Question 27

what is benign deflation caused by and its definition?

Answer 27

falling prices but rising output so not so bad news

a fall in the general price level brought about by a shift of the short run aggregate supply curve

Question 28

if the rate of inflation is running at the same rate what happens to the price level?

Answer 28

prices will be rising at the same rate as before as inflation is still taking place

Question 29

explain why a buoyant housing market and low interest rates might lead to inflation.

Answer 29

more people are incentivised to buy houses due to the rising prices so there is more spending and less saving as its cheaper to borrow money which greatly increases consumption