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Flashcards in Y1 - Inflation Deck (12)
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1
Q

Define inflation

A

A general and sustained increase in prices, measured by CPI

2
Q

Define deflation

A

A fall in the general level of prices (negative inflation)

3
Q

Define disinflation

A

A fall in the general rate of inflation (prices rise more slowly)

4
Q

CPI

A
  • Survey on expenditure used to create basket of goods

- Price survey taken by civil servants who collect data once a month on 650 most commonly used goods/services

5
Q

Limitations of CPI

A
  • Does not include housing costs
  • Measures cost of living for average household (does not include top/bottom 4%
  • Sampling problems = only 57% respond
  • Not representative of people with atypical spending habits
6
Q

Define retail price index

A

Index used to measure inflation that includes housing costs such as mortgage interest repayments
- More inclusive than CPI but not suitable for international comparisons (unique to UK)

7
Q

Define demand-pull inflation

A

An increase in general level of prices caused by increased consumption, investment, government spending or net exports (AD right)

8
Q

Define cost-push inflation

A

An increase in the general level of prices caused by increased production costs such as a rise in wages or a fall in the exchange rate (AS left)

9
Q

Effects of inflation on consumers

A
  • Real values of savings down as price up
  • PPP of people on fixed incomes decrease as price increases
  • People with high levels of debt benefit = real value of debt falls
10
Q

Effects of inflation on firms

A
  • Lots of international competitiveness = exports more expensive and imports cheaper = BOP worsen
  • More uncertainty
  • Less investment from abroad = value of money has fallen
  • Higher prices means firms may be able to make more profits (especially in short term)
11
Q

Effects of inflation on the government

A
  • Redistribution of income = people on fixed incomes will find fall in income
  • Fall in real interest rate so cost of borrowing falls
12
Q

Effect of inflation on workers

A
  • Some workers may want higher wages but firms not confident to may more
  • Trade-off between wage inflation and unemployment (Short run Phillips curve) = high wage rate inflation means easier for people to find work because firms are raising wages