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Economics AS (Macroeconomics) > Inflation > Flashcards

Flashcards in Inflation Deck (15)
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1
Q

Define Inflation?

A

A general and persistent rise in the price level

2
Q

Define inflation rate?

A

A general and persistent rise in the price level, measured as a percentage.

3
Q

Consequences of inflation?

A
  • Reduction in purchasing power if income does not increase at the same rate as the rate of inflation,
  • Savings fall in value.
  • Negative effect on international competitiveness, more expensive items are harder to sell.
  • Lack of confidence. Households and firms are anxious about the economic situation so cancel or postpone purchases.
  • Fiscal Drag. The higher the income, the higher the rate of tax.
  • Shoe leather costs: The time spent looking for cheaper alternatives and the time spend searching for better interest rates.
  • Menu costs: The cost of changing prices.
4
Q

Benefits of inflation?

A
  • Money illusions: Employers can give nominal pay rises equal to the inflation rate which makes employees think that they are richer.
  • Protects from deflation.
  • Erodes the value of debt.
5
Q

What are the two ways of measuring inflation?

A

CPI (consumer price index) and RPI (retail price index)

6
Q

How to calculate CPI?

A

Use the annual publication of “living costs and food survey” to identify a typical expenditure for UK households. Then you select 600 products which fit this pattern, and you assign weights to each item.

7
Q

What are the differences between RPI and CPI?

A
  • RPI contains housing costs, CPI doesn’t.
  • They weight products differently.
  • RPI uses arithmetic mean whereas CPI uses geometric mean.
  • RPI is usually higher than CPI
  • RPI includes mortgage interest rates as an item.
8
Q

Limitations of measuring inflation?

A
  • Some groups like pensioners may not follow the typical average weighting of RPI and CPI.
  • Price rises fail to indicate improvements in quality of existing goods.
9
Q

What are the three causes of inflation?

A
  • Rise in demand but less or no rise in supply.
  • Rise in cost of production.
  • Increase in money supply.
10
Q

What is pull inflation?

A

Rise in demand, but less or no rise in supply

11
Q

What is push inflation?

A

rise in the cost of production.

12
Q

Define demand-pull inflation?

A

Demand-pull inflation is when demand rises but supply is inadequate to meet that demand.

13
Q

What are some solutions to demand pull inflation?

A

FOR WHOM TO PRODUCE

  • First come first serve
  • rationing
  • increase the price (those who most value it will get it)
14
Q

What is cost push inflation?

A

When a rise in the cost of production is passed onto the consumer

15
Q

Why is there inflation as a result in rise in money supply?

A

E (expenditure) = O (output) = Y (income)
The value of all output must be equal to all the money spent to buy it in an economy. All the money spent to buy it= money supply. If the money supply rises but output doesn’t then inflation will occur.