Chapter 4 Year 11 cont

• What is inflation?

  The persistent rise in the general price level
• What happens to the value of money during inflation?

  The value of money falls
• What can happen if uncontrolled inflation continues for a long time?

  The economy can witness a fall in growth and increased unemployment
• What does the government ask the Bank of England to do regarding inflation rates?

  To keep inflation rates at 2%
• How is the rate of inflation calculated?


  As a percentage increase in prices over time
• What is the consumer price index (CPI)?


  A method of presenting statistical changes in prices
• How does the CPI show inflation rates in the UK?


  By comparing prices of regularly bought goods
• What is the selection of goods used in CPI called?

  The basket of goods
• How is CPI calculated using the formula?


  CPI = (new/old) x 100
• How do you calculate the CPI using the example provided?


  1. Time P1: (5 x £1) + (2 x £2) = £9
  2. Time P2: (5 x £2) + (2 x £3) = £16
  3. CPI = (16/9) x 100 = 178.78%
• What is demand-pull inflation?


  A rise in general demand that may lead to shortages
• What can cause a restriction in the supply of products?


  A reduction in output due to a lack of materials
• What is monetary inflation?


  Too much money available in an economy leading to price rises
• What are the consequences of inflation?


  • Impact on poorer sections of society
  • Impact on businesses (wage increases, steady employment, higher costs)
  • Impact on savers
  • Balance of payments impacted
• What is one government policy to manage inflation?


  Increasing direct taxation to reduce disposable income
• What is another government policy to control inflation?


  Reducing costs to control inflation