Inflation

Question 1

What is the definition of inflation

Answer 1

A sustained increase in the general price level

Question 2

What is demand pull inflation

Answer 2

When AD increases, pulling up the price leve, leading to inflation.

Question 3

What is cost push inflation

Answer 3

When increased costs decrease SRAS, increasing the price level and causing inflation

Question 4

What is deflation

Answer 4

A sustained decrease in the general price level

Question 5

How does a deflationary spiral happen

Answer 5

When a decrease in investor and business confidence decreases AD, decreasing the price level, which causes people to delay purchasing which causes the price level to decrease further

Question 6

What causes deflation

Answer 6

A decrease in AD or an increase in AS

Question 7

How is inflation calculated

Answer 7

1) The ONS Calculate the price of the 650 most commonly bought goods and services.; 2) The ONS then finds the average price of these goods and services.; 3) They calculate a weighted average of all goods and services.

Question 8

What is the formula to calculate the weighted average

Answer 8

1) (% of total spending x price) of each good.; 2) Add all of them up.

Question 9

What is the formula for the index

Answer 9

(current number/base number) x100

Question 10

What is disinflation

Answer 10

When the inflation rate is falling, but it is still positive.

Question 11

What are the problems with measuring inflation using the CPI

Answer 11

Unusual spending habits; Time lag; Changes in quality; No mortgages

Question 12

What is the difference between CPI and RPI

Answer 12

Retail price index includes mortgages while CPI doesn’t.

Question 13

What are the benefits of inflation

Answer 13

Protects against risks of negative inflation.; Reduced debt and reduced inequality.; Decreased wages so lower costs.

Question 14

What are the negative effects of inflation

Answer 14

1) It can lead to price-wage spirals and therefore hyperinflation.
2) It can increase innequality
3) It makes investment more risky