Theme 2 Inflation

Question 1

Inflation

Answer 1

Sustained/prolonged general rise in prices. Meaning that on the average the price of goods and services goes up over a period of time.

Question 2

Disinflation

Answer 2

A fall in the rate of inflation but not sufficient to bring about price deflation. Consumer prices are still rising but at a slower rate.
E.g. UK’s annual drop in the annual rate from 7% to 2%

Question 3

Deflation

Answer 3

Sustained period when the general price of goods and services is decreasing. This prevents people from purchasing, demand is shrinking, income is decreasing… Domino effect, e.g. Japan.

Question 4

Hyper-Inflation

Answer 4

Sky-rocketed inflation rate. Nearly always the result of mass money printing, which leads to the currency being devalued.
E.g. Hungary just after WW2, prices doubled every 15 hours.

Question 5

Reflation

Answer 5

The rise in GDP which occurs following a recession.

Question 6

Stagflation

Answer 6

Period of inflation rising, or very high, at a time when the economy is in recession.

Question 7

Calculating Inflation Rate

Answer 7

Change in average prices in an economy over a given time period. P level is measure in the form of an index.

Measured with CPI and RPI

Question 8

CPI

Answer 8

%🔺btw CPI in a different year = inflation rate.

Value basket/value basket base year x 100

Question 9

RPI (Retail Price Index)

Answer 9

Traditional measure of the Plevel in the UK used in a variety of contexts. (E.g. by the govt to index welfare benefits).
RPI measures:
- average price of “typical” basket of goods bought by the average household.
- average consumer prices.

Question 10

Demand-Pull Inflation

Answer 10

Caused by an excess in demand in the economy. Too much D = PL in the economy increases.

Question 11

Cost-Pull Inflation

Answer 11

Caused by changes in the supply side of the economy.

Question 12

Cost of having a high inflation rate

Answer 12

• growth of unemployment
• competitiveness
• redistribution of costs
• political costs
• shoe-leather cost
• menu cost

Question 13

Indexation

Answer 13

Adjusting the value of economic variables such as wages or the rate of interest in line with inflation.

Question 14

Price Level

Answer 14

Average price of goods and services in an economy.

Question 15

Anticipated inflation

Answer 15

Increases the prices which economic actors are able to predict with accuracy.

Question 16

Unanticipated Inflation

Answer 16

Increases the prices which economic actors like consumers and firms fail to predict accurately so their decisions are based on poor information.