Low/Stable Inflation

Question 1

Inflation

Answer 1

Persistant, sustained increase in the average price level in an economy (>3%)

Question 2

Negatives of high inflation (5)

Answer 2

Loss of purchasing power, impact on saving, impact on economic growth, impact on interest rates, impact on exports, impact on labour markets

Question 3

Impact of high inflation on economic growth

Answer 3

People choose to spend money instead of save, banks have less money to lend to producers, less ‘I’ so AD decr and GDP decr

Question 4

What does inflation do to the interest rates?

Answer 4

Interest rates increase as banks need to lend money to consumers at a higher rate than the inflation to ensure their return is positive

Question 5

What does inflation do to exports?

Answer 5

Domestic inflation means goods are more expensive so exports are less competitive in international market.

Question 6

CPI

Answer 6

Consumer price index, measures the price change on a basket of consumer goods. Uses a weighted index to reflect importance of the goods.

Question 7

Issues with measuring inflation (5)

Answer 7

Doesn’t reflect all consumers, consumption habits change, cannot compare countries as different goods, errors in collection and sudden changes

Question 8

How can inflation be measured more accurately?

Answer 8

Core/underlying inflation rate is calculated without groups of products with volatile price changes

Question 9

PPI

Answer 9

Producer price index - measures prices of goods/services used by producers

Question 10

XPI

Answer 10

Export price index - index of prices of exported goods and services

Question 11

MPI

Answer 11

Import price index - index of imported goods and services

Question 12

Two types of inflation

Answer 12

Demand pull and cost push

Question 13

Demand pull inflation

Answer 13

Caused by an increase in AD due to changes in C, G, I, X, M