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Theme 2: The UK economy – performance and policies
2.5 Economic performance
2.5.3 Inflation
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Cards (38)
What is inflation?
Sustained increase in prices
Inflation reduces the
purchasing power
of money.
Demand-pull inflation occurs when aggregate demand exceeds aggregate
supply
What is the primary cause of cost-push inflation?
Rising production costs
The aggregate demand formula is AD = C + I + G + (X -
M
)</latex>.
What does inflation do to the value of money?
Reduces its purchasing power
Demand-pull inflation is caused by excess aggregate
demand
Demand-pull inflation occurs when aggregate demand exceeds
aggregate supply
.
Cost-push inflation arises from rising costs of
production
Steps leading to cost-push inflation:
1️⃣ Rising production costs
2️⃣ Firms increase prices to maintain profits
3️⃣ General price level rises
How does inflation affect consumers?
Reduces purchasing power
Inflation can lead to higher
prices
for businesses.
For consumers, inflation reduces their
purchasing
power.
What is the impact of inflation on businesses?
Increases production costs
Inflation can decrease the value of
consumer
savings.
Inflation reduces purchasing power and potentially decreases the value of consumer
savings
.
What is one effect of inflation on businesses?
Increased production costs
Inflation can lead to changes in investment, employment, and
economic growth
.
If inflation is 2%, what is the effective value of £1000 savings after one year?
£980
The formula for calculating the future value of money considering inflation is
F
V
=
FV =
F
V
=
P
V
(
1
+
r
)
−
n
PV (1 + r)^{ - n}
P
V
(
1
+
r
)
−
n
, where
P
V
PV
P
V
is the present value.
Inflation reduces the
purchasing power
of money.
What is the definition of inflation?
Sustained increase in prices
Demand-pull inflation occurs when aggregate demand exceeds aggregate
supply
What is an example of a cost-push inflation cause?
Rising oil prices
Cost-push inflation arises from excessive aggregate demand.
False
Cost-push inflation reduces aggregate
supply
Match the type of inflation with its description:
Cost-Push Inflation ↔️ Rising production costs
Demand-Pull Inflation ↔️ Excessive aggregate demand
What are the two primary indices used to measure inflation?
CPI and RPI
The CPI uses a geometric mean, making it less sensitive to
outliers
The RPI is calculated as the
arithmetic mean
of price changes.
How does inflation affect consumers?
Reduced purchasing power
The formula for the future value of money considering inflation is
F
V
=
FV =
F
V
=
P
V
(
1
+
r
)
−
n
PV (1 + r)^{ - n}
P
V
(
1
+
r
)
−
n
, where
r
r
r
is the inflation rate
What is an example of a monetary policy to control inflation?
Raising interest rates
Fiscal policy lowers demand-pull inflation by reducing aggregate
demand
Reducing inflation always leads to higher
unemployment
.
What is one challenge in managing inflation related to economic growth?
Slowed economic growth
Inaccurate inflation forecasts make policy decisions more
difficult
External shocks, such as oil price spikes, can unexpectedly affect
inflation
.