Inflation

Question 1

What is the inflation target rate

Answer 1

2%

Question 2

What was the inflation in October 2022

Answer 2

11.1%

Question 3

Explain how inflation negatively impacts investment

Answer 3

• Creates uncertainty about the future decentivising firms
• Means interest rates are likely to increase in the long term

Question 4

Explain how inflation negatively impacts international competitiveness

Answer 4

If inflation rates are higher than in other countries, UK goods and services are less price competitive, reducing exports

Question 5

Explain how inflation impacts living standards

Answer 5

Reduces consumption so reduces standard of living

Question 6

Who are the ‘winners and losers’ in inflation

Answer 6

Winners are people with a fixed interest rate

Losers are people with a fixed income e.g. pensioners and current account holders

Question 7

Why is the inflation target not 0%

Answer 7

• Nominal wage goes up more but real wage stays the same (psychological)
• Less risk of deflation

Question 8

What is the difference between malevolent and benign deflation

Answer 8

• Malevolent is caused by lack of demand
• Benign is caused by lower costs of production

Question 9

What are the drawbacks of malevolent deflation

Answer 9

• Consumers expect falling prices so save more to wait for the price to decrease
• Deflation increased the value of fixed debt so people with fixed debt save more
• Banks can’t boost AD through negative real interest rates because inflation is negative

Question 10

What are the causes of benign deflation

Answer 10

• Technology increases productivity
• Cheaper imports

Question 11

Inflation/deflation evaluation

Answer 11

• is it malevolent or benign
• extent and time period
• what is happening in other countries

Question 12

What are causes demand pull inflation

Answer 12

• positive output gap
• Firms see opportunity to have better profit margins by putting prices up
• Firms have to increase output to meet demand, which costs money

Question 13

What are the causes of cost push inflation

Answer 13

• costs of production rise so firms increase prices to maintain profit margins

Question 14

Explain the wage price spiral

Answer 14

When inflation causes workers to demand higher wages, causing costs of production to increase, causing more cost push inflation (cycle repeats)

Question 15

How do changes in commodity prices impact inflation

Answer 15

• Increase in oil prices can cause stagflation (worry since 1970s)
• Decrease in oil prices can cause benign deflation (2014/15)

Question 16

What is some evaluation for how changes in commodity prices impact inflation

Answer 16

• Size and duration of change in price
• How much the commodity is consumed
• Does the country import or export the good
• Starting position of the economy
• Secondary effects? e.g. wage price spirals
• Policy response from government and bank of england