Macroeconomics 2.4 Inflation Flashcards
What is inflation?
A general, sustained increase in the price level or a fall in the purchasing power of money.
Define deflation.
A fall in the price level and an increase in the purchasing power of money.
What is disinflation?
When the rate of inflation is falling; prices are still rising but at a slower rate.
What is hyperinflation?
When inflation is out of control with massive, rapid rises in the general price level.
What is the policy objective of low and stable inflation?
To achieve a low and stable rate of increase in the price level, ideally aiming for 2% per year.
What are real values?
Values that have been adjusted for inflation.
What are nominal values?
Values that have not been adjusted for inflation.
How is inflation measured using the Consumer Prices Index (CPI)?
By calculating the change in the average price level of a hypothetical basket of goods and services over time.
What does CPIH include?
CPIH includes the cost of owning, living in, and maintaining a home but excludes mortgage interest payments.
What was the target CPI rise set by the Government?
2% each year.
What does the Retail Price Index (RPI) measure?
A measure of inflation that includes costs such as mortgage interest payments.
True or False: The CPI replaced the RPI in 2004.
True
What causes demand-pull inflation?
Increased demand in the economy outstripping supply.
What is cost-push inflation?
Inflation that occurs when the costs of production increase, leading to higher prices.
Fill in the blank: Hyperinflation often leads to _______.
mass printing of cash.
What are the consequences of hyperinflation?
Negative impacts on savers and those on fixed incomes, potential collapse of the business sector.
What does indexation refer to?
Adjusting the value of economic variables in line with the rate of inflation.
What is anticipated inflation?
Inflation that economic agents expect to occur.
What is unanticipated inflation?
Inflation that is not expected by economic agents.
What are the weights in the context of CPI?
The relative importance of goods and services in the ‘basket of goods’.
What is the average price level?
The average prices of goods and services in the economy.
What is the impact of high and unstable inflation?
Creates uncertainty which makes planning difficult.
What is the significance of the CPIH?
It is a more comprehensive measure of inflation that includes housing costs.
Which UK measure of inflation was modified to exclude mortgage interest payments?
RPIX.
What is the inflation rate?
The annual percentage change in the average price level in an economy over time.
What happens during disinflation?
Prices are still rising but at a slower rate.
What is the effect of a rise in world commodity prices on inflation?
It can lead to an increase in the price level and inflation rate.
What phenomenon can occur due to a wage-price spiral?
An ongoing cycle of rising wages and rising prices.
What is the consequence of deflation in an economy?
Increased purchasing power of money but potential economic stagnation.
