2.1.2 Inflation

Cards (38)

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