Price Stability (3.4)

Question 1

What i the cost of living

Answer 1

The price level of goods and services bought by a household

Question 2

What is inflation

Answer 2

A sustained rise in the general price level over time

Question 3

What is price stability

Answer 3

When the price level stays constant over time or grows at an acceptably low rate

Question 4

What is the rate of inflation

Answer 4

The percentage rise in the general price level over time

Question 5

What is a nominal value

Answer 5

The value of something expressed as a monetary amount

Question 6

What is a real value

Answer 6

ReAl values take inflation into account

Question 7

What is consumer price index CPI

Answer 7

Method used to calculate the rate of inflation

Question 8

What is demand pull inflation

Answer 8

When the demand in an economy rises and supply of goods and services does not increase to match the increase of demand so the price level is pulled up

Question 9

What is cost push inflation

Answer 9

When the cost of production increases leading to a rise in the price level

Question 10

What are the consequences of inflation for consumers

Answer 10

– Loss of consumer confidence: when prices are stable consumers know the relative prices of goods and service .if there is inflation the value of that money changes making them less confident
– Shoe leather costs: as price change more often consumers have to spend more time shopping around
-Real income may fall: the nominal income will stay the same but the real income will fall
-debtors gain
-savers loose

Question 11

What are the consequences of inflation for producers

Answer 11

– Menu costs: firms have to change their pricelists more often ,this costs money to change menus for example
- unemployment: inflation makes the UK economy less competitive leading to unemployment

Question 12

what is the cost of living

Answer 12

the price level of goods and services bought

Question 13

what is inflation

Answer 13

a sustained rise in the general price level over time

Question 14

what is price stability

Answer 14

when the general price level stays constant or grows at an acceptably low rate

Question 15

what is rate of inflation

Answer 15

the percentage rise in the general price level over time

Question 16

what is a real value

Answer 16

value taking inflation into account- refers to the goods and services that can be bought with that value

Question 17

what is a nominal value

Answer 17

a value as a monetary amount

Question 18

what is consumer price index (CPI)

Answer 18

the method used to calculate the rate of inflation

Question 19

what is demand-pull inflation

Answer 19

when the total demand in an economy rises and the supply of goods and services does not rise to match the new demand causing the price level to be pulled up

Question 20

what is cost-push inflation

Answer 20

caused when cost of production increases and as a result the price level will rise

Question 21

what is a wage-price spiral

Answer 21

a circle process in which wage increases cause price increases which in turn cause wage increases

Question 22

consequences inflation for consumers

Answer 22

• loss in consumer confidence : if the price level isnt stable then consumers loose confidence in what they can and cant afford
• shoe leather costs : as the price level changes more often people spend more time looking around for the best offer
• real incomes may fall
• consumers who are debtors gain : as real value of debt falls
• savers lose : real value of their savings fall

Question 23

what are the consequences of inflation for producers

Answer 23

• menu costs : firms have to adjust there prices more often and this costs money to reprint
• labour market conflicts : trade unions will be aware of the inflation meaning they will want wages to rise as to keep their workers real wage the same. Also they then may ask for even more pay rises to prepare for future inflation
• unemployment : inflation makes the market less competitive
• • producers lose as creditors : creditors like banks who are owed money , the real value of the money they are payed back will have fallen due to inflation
• producers also lose confidence and are less likely to invest

Question 24

what are the consequences of inflation for the government

Answer 24

• government gains as debtors
• government has to spend more money on benefits
• -government spends more as a major employer : as wages rise they have to pay more for example NHS
• government receives more as tax