Topic 3 - Inflation and Deflation

Question 1

What is inflation

Answer 1

The inrease in average prices of goods and services over a period of time

Question 2

What is deflation

Answer 2

The decrease in average prices of goods and services over time

Question 3

What are the types of deflation

Answer 3

Benign and Malovelent

Question 4

What is benign delfation

Answer 4

Deflation caused by cheaper costs of production

Question 5

What is malevolent deflation

Answer 5

The fall in demand, making prices drop too

Question 6

What are the consequences of inflation(4)

Answer 6

Impacts international competitiveness
Fiscal drag
Effects on investment
Affects income

Question 7

How does inflation affect international comp

Answer 7

As the cost of production in a economy is higher

Question 8

What is fiscal drag

Answer 8

Where inflation causes workers wages to increase, potentially pushing them into higher tax brackets

Question 9

How does inflation effect investment

Answer 9

As interest rates are higher (to control inflation ), therefore less will be spent and more saved

Question 10

What is an inflationary pressure

Answer 10

Something that influences inflation

Question 11

What is demand pull inflation

Answer 11

Infltion caused by an increase in demand

Question 12

What is cost push inflation

Answer 12

Inflation cused by an increase in production costs

Question 13

What are some consequences of deflation(4)

Answer 13

Consumers may hold back on savings, as they expect prices to drop futher

Debt increases

Cost of borrowing increases - if interest rates arent changed

Lower profit margins

Fall in assets value and prices

Question 14

What are policies to control deflation(6)

Answer 14

Lower interest rates
Cheaper loans
Inc credit availablity
Devaluation
Fiscal stimulus measures
Higher gov spending
Lower direct taxes

Question 15

How is deflation and inflation measured

Answer 15

Via RPI and CPI

Question 16

What is CPI

Answer 16

Consumer price index

Question 17

What is RPI

Answer 17

Retail price index

Question 18

What method does CPI use

Answer 18

A basket of goods approach

Question 19

Where does the data for the basket of goods method used in CPI come from

Answer 19

The family expenditure survey

Question 20

Is CPI a weighted price index

Answer 20

Yes

Question 21

What is a weighted price index

Answer 21

Where products/markets are given a weighting in the economy respective to how much money is spent on them

Question 22

How is weighted price index calculated

Answer 22

Weighting x Price index

Question 23

What are some criticisms of CPI(4)

Answer 23

Not fully representative
Doesn’t show spending patterns or reasons
Does account for quality changes
It is slow to react to new products .

Question 24

Does CPi include house prices and related areas

Answer 24

No, but RPI does

Question 25

What is the quantative theory of money

Answer 25

The link between money and general price level

Question 26

How is the quantative theory of money calculated

Answer 26

Money x Circulation of money = Price level x Output/GDP

Question 27

Benefits of low inflation

Answer 27

Stability in the economy as firms can predict future costs and prices

Firms may increase production as demand for products are always gonna be there, even with higher prices

Encourages spending as there is no worry the value of money will fall

Prevents booms and bust cycles

Encourages spending, as no speculation wether prices will fall

Increases value of asset prices (good for those who have saved), e.g. A house was worth 50000 20years ago but now is worth 200000