inflation

Question 1

what is disinflation

Answer 1

a decrease in the rate of inflation

Question 2

what are price indices

Answer 2

measure changes in the general level of prices
these are weighted averages of price changes based on average levels of spending on a wide range of consumer goods and services

Question 3

interpreting price indices

Answer 3

like other index numbers price indices have a base year of 100
the % change is added to 100
they’re calculated by recording the prices of a basket of goods and services that are thought to be typical of what an average family would buy
price levels for diff products are weighted according to how important the product is in a typical households total spending

Question 4

what’s meant by the rate of inflation

Answer 4

it’s the annual percentage change in the average level of prices from year to year

Question 5

name 2 measures of inflation

Answer 5

CPI consumer price index
RPI retail price index

Question 6

what is CPI

Answer 6

it’s the headline rate and forms the basis for the government’s inflation target
it excludes mortgage interest payments and housing costs

Question 7

what is RPI

Answer 7

includes housing costs such as council tax and mortgage interest payments
it’s used to decide state pension and benefit levels

Question 8

what is a real value

Answer 8

it has the effect of inflation removed
real value can be applied to any money value not just income e.g real GDP and real interest rates

Question 9

and is a nominal value

Answer 9

anything nominal has its value expressed in current prices e.g in numerical terms

Question 10

what is a current price

Answer 10

value each item in terms of the prices that year

Question 11

what is a constant price

Answer 11

real values are expressed in constant prices
the data for each year is shown as the value they would have had in the prices of a particular base year
effects of inflation is removed

Question 12

demand pull inflation

Answer 12

arises when the economy is overheating in a boom
AD exceeds AS
prices prise in response to market pressure
if AD curve shifts further to the right any rise in output will involve higher prices

Question 13

what is cost push inflation

Answer 13

occurs when costs of production are rising
import prices may rise
wage negotiations may end in labour costs rising
rent and other costs may rise
cost inflation causes AS curves to shift upwards

Question 14

what is an inflationary spiral

Answer 14

when inflations been accelerating for a while there will be cost push and demand pull pressures

Question 15

impact of inflation on firms- uncertainty

Answer 15

inflation makes it harder for businesses to make accurate cash flow, cost and rev forecasts bcs prices and costs are constantly changing so it’s very difficult to forecast future profits
plans to invest and expand production become riskier so inflation is likely to lead to lower investment

Question 16

impact of inflation on firms- loss of competitiveness

Answer 16

inflation may make exports less competitive if competing economies have lower inflation rates
if the exchange rate is allowed to depreciate it may be possible to adjust automatically but there will still be some uncertainty

Question 17

impact of inflation on individuals- loss of real income

Answer 17

the nominal rate of interest may be less than the rate of inflation
people on fixed incomes lose out if these are not raised in line with inflation
this can affect pensioners and people on benefits

Question 18

impact of inflation on individuals- savers and borrowers

Answer 18

money loses its value and people lose confidence in money as the real value of their savings is reduced
this makes savers worse off, they will be less wealthy after a period of higher than average inflation
people who borrow gain gain bcs other time the value of money falls, the nominal value they repay is worth less in real terms than when they borrowed