Measures Of Economic Performance - Inflation Flashcards
Inflation is the rate of _________ in rices in an economy. An annual inflation rate of 5% in one year simply means that prices are 5% __________ than the previous year
Increase
Higher
What are the two main methods used to calculate inflation in the UK
CPI and RPI
For both CPI and RPI, the prices of a ‘basket’ of goods are collected every ________, and compared over time. A broad range of goods from various geographical areas is collected to obtain a reliable average. More important goods are given a greater ___________ in the calculation
Month
Weighting
What is the key difference between CPI and RPI
RPI includes housing costs
Limitations of inflation measures
Changes in quality ( the price of a good may improve because the quality has improved - so the inflation may be be an overestimate
Temporary shocks - (War, natural disaster)
Substitutes - When the price of a good rises, consumption of that good may fall as people swap to substitute
2 causes of inflation
Demand-pull inflation
Cost-push inflation
Demand pull inflation occurs when ____ is growing at an unsustainable rate leading to ____________ pressure on scarce resources and a _________ output gap. When there is _________ _________, producers can raise their prices and achieve bigger __________ margins
AD Increased Positive Excess demand Profit
Describe demand-pull inflation
Demand pull inflation occurs when AD is growing at an unsustainable rate leading to increased pressure on scarce resources and a positive output gap. When there is excess demand, producers can raise their prices and achieve bigger profit margins
When is demand-pull inflation likely
When there is full employment of resources and SRAS is inelastic
What are the main causes of demand-pull inflation
A depreciation of the exchange rate
Reduced taxes
A fall in interest rate
Fast growth in other countries
Cost-push inflation occurs when firms respond to __________ costs by increasing prices in order to _________ their profit margins
Rising
Protect
Reasons why costs may rise (leading to cost-push inflation)
Component costs Rising labour costs Expectations of inflation Higher indirect taxes A fall in the exchange rate (increased prices of imported products) Monopoly employers
Effects of inflation
Uncertainty International competitiveness Erosion of the real value of savings Fixed incomes Menu and shoe-leather costs Wage-price spiral
If the rate of _________ is too high, people may actually be losing out in real terms. Therefore is it important that the rate of _________ they get on their money _________ the rate of inflation
Inflation
Interest
Exceeds
Workers may lose some purchasing power if their incomes are not protected from __________
Inflation
