Measuring Inflation

Question 1

Inflation

Answer 1

general rising prices

Question 2

deflation

Answer 2

general falling prices

Question 3

hyperinflation

Answer 3

Prices rising extremely quickly

Question 4

disinflation

Answer 4

slowing rate of inflation

Question 5

What is the first survey in the RPI

Answer 5

Living costs and food survey which finds out what people spend money on to work out weighting 6000 households

Question 6

What is the second survey in the RPI

Answer 6

Measures change in prices of 700 commonly used goods which is the basket of goods

Question 7

How does RPI calculate inflation

Answer 7

price changes multiplied by weightings

Question 8

What are the three main differences in CPI from RPI

Answer 8

• excludes mortgage interest payments
• uses slightly different formula
• Uses larger sample of pop

Question 9

limitations of RPI and CPI

Answer 9

• RPI excludes top 4% of income
• living costs and food survey can be inaccurate
• Basket of goods changes once a year so misses short term spending habits

Question 10

Other uses of RPI and CPI

Answer 10

• Used as a starting point in wage negotiations
• Used to decide state pensions
• Some benefits rise automatically with the index
• Determines international competitiveness as if UK inflation is higher they become less competitive.

Question 11

Causes of Cost Push Inflation

Answer 11

• rise in wages and can lead to wage price spiral
• rise in cost of imported raw materials
• rise in indirect taxes

Question 12

Causes of Demand Pull inflation

Answer 12

• high consumer spending in low interest rates or high confidence
• excess money in economy doesn’t match the output of goods and services so people have more money but less to spend on.
• bottleneck shortages, as demand grows quickly when resources are already being fully used, so shortages in supply which increase price

Question 13

cost push inflation

Answer 13

Inflation caused by rising costs to inputs to production

Question 14

Demand Pull inflation

Answer 14

inflation caused by excessive growth in aggregate demand not matched by aggregate supply.

Question 15

consequences of inflation

Answer 15

• cost of living increases which damages standard of living for low incomes
• Discourages saving as value will fall so people will spend which worsens inflation
• exports will fall as they a more expensive but imports will rise as they become cheaper.
• Firms reduce investment as they will have less savings, less confidence, higher interest rates
• shoe leather and menu costs
• Wage increases so increase to cost of production

Question 16

shoe leather and menu costs

Answer 16

shoe leather costs - cost of extra time taken by consumers to search for up to date price information
Menu Costs - cost to firms of having to alter price information.