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MACRO 2.1
2.1.2 Inflation
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Cards (38)
What is inflation?
Sustained increase in
average price level
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What does inflation indicate about money value?
It indicates a
decrease
in money's value
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What is deflation?
Decrease in
average price level
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What is disinflation?
Decrease
in
the
rate
of
inflation
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What does CPI stand for?
Consumer Price Index
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Why is CPI important?
It measures
inflation
for government policies
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What are the importance of inflation?
Decides
interest rates
Influences
pensions
and benefits
Affects business pricing and wages
Impacts
currency exchange rates
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What does the Family Expenditure Survey measure?
Household
purchasing power and
spending
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How is the basket of goods for CPI created?
Based on
consumer spending patterns
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Why does petrol have a higher weighting than tea in CPI?
More
income
is spent on
petrol
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How often is the basket of goods updated?
Each year
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What are the limitations of CPI?
Averages
affect
individuals
differently
Ignores
regional
price differences
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What does RPI stand for?
Retail Price Index
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How does RPI differ from CPI?
RPI includes
housing costs
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Why does RPI tend to have a higher value than CPI?
RPI includes
housing costs
like
mortgages
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Who does RPI exclude?
Top
4%
earners and low-income pensioners
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What does CPI account for that RPI does not?
Consumer
switching to cheaper products
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What are the causes of inflation?
Demand Pull Inflation
Cost Push Inflation
Growth of the
money supply
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What is Demand Pull inflation?
Too much demand with
insufficient
capacity
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What can cause excess demand?
Decrease in
income tax
increases
disposable income
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How do lower interest rates affect demand?
They increase
disposable income
and spending
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What happens when the exchange rate depreciates?
Imports
become
more
expensive
,
exports
cheaper
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What is Cost Push inflation?
Higher costs for firms lead to
price increases
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What can cause an increase in costs for firms?
Higher wages achieved by
trade unions
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How can a fall in exchange rate affect costs?
It can increase the cost of
imports
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What effect do indirect tax increases have?
They increase costs for
businesses
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What happens if the Bank of England prints more money?
More money flows in the
economy
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What is hyperinflation?
Extremely high and
uncontrollable
inflation
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When is an increase in money supply inflationary?
If it exceeds the rate of
real output
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What does the equation M x V = P x Y represent?
Relationship between
money supply
and
output
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What does M represent in the equation?
Total money in the
money supply
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What does V represent in the equation?
Number of times money
circulates
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What does P represent in the equation?
Average
level
of
prices
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What does Y represent in the equation?
Output of
goods and services
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How does inflation affect consumers?
Hits
low and fixed income
hardest
Decreases
purchasing power
of money
Reduces
real value
of
debt
for borrowers
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How does inflation affect firms?
Low
interest rates
encourage borrowing
High inflation raises
investment costs
Unpredictable inflation reduces
business confidence
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How does inflation affect the government?
Increases
state pension
and welfare payments
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How does inflation affect workers?
Real incomes
fall with inflation
Less
disposable income
for workers
Potential for redundancies due to higher costs
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