LS3 - Inflation

Question 1

What is inflation, deflation and disinflation?

Answer 1

Inflation is the sustained increase in the cost of living. Disinflation is fall in the rate of inflation. Deflation is the negative inflation so a decrease in the cost of living.

Question 2

How do I calculate the rate of inflation using the CPI?

Answer 2

You take the price index in the year wanted and multiply it by the questionnaire finding.

Question 3

What are the limitations of using the CPI

Answer 3

It is not full representative, innacurate for anomalies like the non typical households

Question 4

What is RPI as an alternative measure of the rate of inflation?

Answer 4

Retail price index, it includes housing costs which allows RPI to have a higher value than CPI

Question 5

What are the causes of inflation?

Answer 5

Demand pull (this occurs when total demand for goods and services exceed total supply) , cost push (this occurs when the costs of production for a business increases), growth of the money supply (this occurs when an economy’s money supply is increased more quickly than the economy’s growth rate.

Question 6

What is the effects of inflation on consumers, firms, the government and workers?

Answer 6

Inflation allows wealthy consumers to win due to asset price inflation. Exporting firms may lose sales and profits if they become less competitive due to rising inflation. The government target a low inflation rate as a goal to allow the cost of living to become affordable. The workers in low paid jobs will lose from rising inflation as they have little bargaining power.