Theme 2- Inflation (key terms)

Question 1

Inflation

Answer 1

• A rise in the overall or average price level
• Calculated as the % change in the CPI or RPI over a year
• Target of 2% per year

Question 2

Deflation

Answer 2

When the overall price level falls instead of rises
- Would be expressed as a negative inflation number e.g. -2%

Question 3

Disinflation

Answer 3

• When the rate of inflation falls - but it’s still positive
• Prices are still rising, but a slower rate

Question 4

Consumer Price Index (CPI)

Answer 4

A measure of the average level of prices in the UK, based on a representative ‘basket’ used by the Government and Bank of England

Question 5

Creeping inflation

Answer 5

Small rises in the general price level over a long period, low positive rate of inflation

Question 6

Inflationary pressures

Answer 6

Demand and supply-side pressures that can cause a rise in the general price level
- Demand-pull inflationary pressure is greatest when actual GDP exceeds potential GDP - positive output gap.
- Cost-push inflationary pressure can arise from increases in unit wage costs, rising import prices, an increase in prices of raw materials, fuel and components used in production

Question 7

Stagflation

Answer 7

A combination of slow growth and rising inflation
- The most notable recent period of stagflation occurred during the 1970s, when world oil prices rose dramatically, and UK inflation rose at one point to nearly 30 per cent

Question 8

Relative deflation

Answer 8

An economy with an inflation rate which is lower than comparable economies. Over time, a low relative rate of inflation can lead to improved price competitiveness

Question 9

Household Consumption Expenditure Survey

Answer 9

• The first survey you need to calculate CPI inflation
• You need a ‘representative basket of goods & services’
• Government does a survey of nearly 7000 households’ spending habits

Question 10

Weightings

Answer 10

• Goods or services that people spend a lot of their money on will have a higher weighting
• e.g. electricity bills and housing bills have a higher weighting

Question 11

Demand-pull inflation

Answer 11

• Inflation caused by an excess of AD over AS
• People are spending more and firms might not be able to increase production quickly enough (‘Bottlenecks’)

Question 12

Cost-push inflation

Answer 12

• Inflation caused by rising costs of production either domestically or from importing raw materials at higher prices due to exchange rate depreciation
• Costs passed on to consumers as higher prices - inflation rises

Question 13

Price stability

Answer 13

Occurs when there is a low positive inflation rate of between 1-3% and price changes that do occur have little impact on day-to-day decisions of people and businesses

Question 14

Price level

Answer 14

The weighted average price of goods and services produced in an economy

Question 15

Fiscal drag

Answer 15

Where inflation and earnings growth may push more taxpayers into higher tax brackets -> raising gov tax revenue -> improve budget deficit
However: income inequality (secondary macro objective)