INFLATION

Question 1

WHAT IS INFLATION?

Answer 1

SUSTAINED RISE IN THE AVERAGE PRICE LEVEL OF GOODS AND SERVICES WHICH REDUCES THE PURCHASING POWER OF MONEY.

Question 2

WHAT R THE WAYS OF MEASURING INFLATION?

Answer 2

1. CPI
2. RPI

Question 3

WHEN IS CPI USED?

Answer 3

1. VALUING STATE PENSIONS
2. AS THE INFLATION TARGET

Question 4

WHEN IS RPI USED?

Answer 4

1. TO SET IR ON STUDENT LOANS
2. FOR INDEX-LINKED GOVT BONDS

Question 5

WHAT R THE DIFFERENCES BETWEEN CPI AND RPI?

Answer 5

1. CPI INCLUDES ALL HOUSEHOLDS BUT RPI EXCLUDES TOP 4% OF EARNERS AND PENSIONERS
2. RPI INCLUDES HOUSING COSTS BUT CPI DOESN’T

Question 6

WHAT R THE PROBLEMS OF USING CPI AS A MEASURE OF INFLATION?

Answer 6

1. DOESN’T INCLUDE HOUSING COSTS
2. NOT REPRESENTATIVE OF THOSE WITH ATYPICAL SPENDING E.G NON CAR OWNERS
3. SAMPLING PROBLEMS (ONLY 60% RESPOND TO SURVEY)
4. TASTES AND FASHIONS CHANGE MORE QUICKLY THAN ONCE A YR FOR THE BASKET

Question 7

WHAT IS THE CURRENT TARGET LEVEL FOR INFLATION?

Answer 7

2%

Question 8

WHAT IS A NOMINAL VALUE?

Answer 8

MONETARY VALUE NOT ADJUSTED FOR INFLATION.

Question 9

WHAT IS A REAL VALUE?

Answer 9

MONETARY VALUE TAKING INTO ACCOINT INFLATION I.E A MEASURE OF PURCHASING POWER.

Question 10

WHAT IS DEMAND PULL INFLATION?

Answer 10

INFLATION INITIATED BY MORE AD IN THE ECONOMY THAN CAN BE SUPPLIED AT EXISTING PRICES.

Question 11

WHAT R EXAMPLES OF COST PUSH INFLATION?

Answer 11

1. HIGHER MIN WAGE
2. HIGHER INDIRECT TAXES
3. INCREASED REGULATION
4. LOWER SUPPLY OF COMMODITIES E.G DROUGHTS

Question 11

WHAT R EXAMPLES OF DEMAND PULL INFLATION?

Answer 11

1. WEALTH EFFECTS
2. LOW TAXES
3. LOW IR
4. HIGHER CONFIDENCE
5. POSITIVE TRADE BALANCE

Question 12

WHAT IS COST PUSH INFLATION?

Answer 12

INFLATION INITIATED BY INCREASES IN COP TO PRODUCERS WHICH R PASSED TO CONSUMERS.

Question 13

WHAT IS A WAGE PRICE SPIRAL?

Answer 13

HOW INFLATION CAN BECOME PERMANENT. PROCESS BY WHICH INCREASES IN WAGES LEADS TO INCREASES IN PRICES WHICH IN TURN LEADS TO INCREASES IN WAGES AND SO ON. CAN CREATE A POSITIVE OUTPUT GAP.

Question 14

WHAT R THE COSTS TO FIRMS OF INFLATION?

Answer 14

1. REDUCES CERTAINTY AND REDUCES MPI
2. FORCED TO PAY HIGHER WAGES TO MAINTAIN WORKER’S REAL STANDARD OF LIVING
3. MENU COSTS
4. FALL IN EXPORTS
5. HIGHER IR RAISING COSTS OF BORROWING

Question 15

WHAT R MENU COSTS?

Answer 15

FIRMS HAVE TO SPEND ON CHANGING THEIR PROMOTIONAL MATERIAL E.G ADVERTS AND SPECIAL PRICING AS INFLATION WILL INCREASE THEIR COSTS AND LEADS TO THEM HAVING TO CHANGE PRICES.

Question 16

WHAT R THE COSTS OF INFLATION TO CONSUMERS?

Answer 16

1. ERODES PURCHASING POWER
2. SHOE LEATHER COSTS

Question 17

WHAT R SHOE LEVEL COSTS?

Answer 17

CONSUMERS WILL WASTE TIME LOOKING FOR A BARGAIN AS THEY MISTAKENLY BELIEVE THAT INDIVIDUAL FIRMS ARE PRICE GAUGING WHEN INSTEAD THE GENERAL PRICE LEVEL IS RISING.

Question 18

WHAT R THE COSTS OF INFLATION FOR WORKERS?

Answer 18

1. REDUNDANCY/ UNEMPLOYMENT
2. FISCAL DRAG

Question 19

WHAT R THE COSTS OF INFLATION FOR THE GOVT?

Answer 19

1. BALANCE OF PAYMENTS DEFICIT
2. UNEMPLOYMENT
3. NEGATIVE IMPACT ON FISCAL DEFICIT

Question 20

R THERE ANY POSITIVE IMPACTS OF INFLATION?

Answer 20

ERODES REAL VALUE OF DEBT WHICH REDUCES INEQUALITY AS LOW INCOME CONSUMERS ARE NET BORROWERS AND HIGHER INCOME CONSUMERS ARE NET SAVERS.

Question 21

WHAT IS DISINFLATION?

Answer 21

TERM USED TO DESCRIBE A DECLINE IN THE RATE OF INFLATION E.G FROM 5% TO 2% - AVERAGE PRICE LEVEL INCREASING AT A SLOWER RATE.

Question 22

WHAT IS DEFLATION?

Answer 22

A SUSTAINED FALL IN THE AVERAGE PRICE LEVEL - A NEGATIVE INFLATION RATE E.G 2% TO -3%

Question 23

WHAT PROBLEMS DOES DEFLATION CREATE?

Answer 23

1. DEFLATIONARY PRICE SPIRAL
2. INCREASES IN THE REAL VALUE OF DEBT
3. NEGATIVE WEALTH EFFECTS
4. LIQUIDITY TRAPS

Question 24

HOW CAN DEFLATION BE REDUCED?

Answer 24

1. LOWERING IR 2. QE 3. LOWER TAXES 4. INCREASING GOVT SPENDING TO INCREASE CONFIDENCE

Question 25

WHAT IS STAGFLATION?

Answer 25

OCCURS WHEN THERE IS RISING INFLATION ACCOMPANIED BY FALLING ECONOMIC GROWTH AND RISING UNEMPLOYMENT.

Question 26

WHAT IS HYPERINFLATION?

Answer 26

PERIOD OF HIGH INFLATION.

Question 27

WHAT FIGURE REPRESENTS HYPERINFLATION?

Answer 27

RATES HIGHER THAN 50% PER MONTH

Question 28

WHAT IS A DEFLATIONARY PRICE SPIRAL?

Answer 28

AS PRICES FALL, CONSUMERS AND FIRMS DELAY EXPENDITURE CAUSING AD TO FALL. THIS CAUSES PRICE LEVEL TO FALL MEANING CONSUMERS AND FIRMS CONTINUE TO DELAY EXPENDITURE.

Question 29

WHAT IS AN INDEX NUMBER?

Answer 29

AN ECONOMIC DATA FIGURE THAT SHOWS THE PERCENTAGE CHANGE IN PRICE FROM THE BASE YR.

Question 30

WHAT IS MEANT BY PRICE LEVEL?

Answer 30

THE AVERAGE OF THE CURRENT PRICES OF GOODS AND SERVICES IN THE ECONOMY.

Question 31

WHAT IS THE 1ST STEP OF MEASURING INFLATION?

Answer 31

THE ONS FIND OUT WHAT BRITISH HOUSEHOLDS BUY THROUGH EXPENDITURE SURVEYS. THEY THEN CREATE AN AVERAGE BASKET OF GOODS OF ABOUT 700 GOODS TO TRACK THE PRICES OF.

Question 32

WHAT IS THE 2ND STEP OF MEASURING INFLATION?

Answer 32

PRICES THESE GOODS R SOLD AT IN DIFFERENT SHOPS R RECORDED IN A PRICE SURVEY. THE AVERAGE PRICES OF THE 700 ITEMS R THEN CALCULATED.

Question 33

WHAT IS THE 3RD STEP OF MEASURING INFLATION?

Answer 33

THE AVERAGE INFLATION RATE IS THEN CALCULATED. EACH INDIVIDUAL PRICE CHANGE IS WEIGHTED ACCORDING TO HOW IMPORTANT IT IS IN THE TYPICAL HOUSEHOLD'S BUDGET.

Question 34

WHAT IS THE 4TH STEP OF MEASURING INFLATION?

Answer 34

AN INDEX NUMBER IS THEN GIVEN TO THE LEVEL OF PRICES AND COMPARED TO THE BASE YR.

Question 35

WHAT IS THE INDEX NUMBER FOR THE BASE YR.

Answer 35

100

Question 36

WHAT IS AN INTEREST RATE?

Answer 36

THE CREDIT FOR SAVING AND THE COST OF BORRROWING.