Inflation (Pack 7)

• What does the term "CPI" stand for?

  Consumer Price Index is a measure of the average change over time in the prices paid by consumers on the basket of goods since 2004
• If the CPI rises from 140 to 145, what is the rate of inflation?

  3.57%
• What is involved in calculating the CPI?

  Gathering price data for a basket of goods
• What is a weighted average?

  Averages that account for the importance of items
• Why is a weighted average important in calculating inflation?

  It reflects the relative importance of goods in consumption
• What are at least three limitations of the CPI?

  • Does not account for changes in consumer behavior
  • May not reflect regional price differences
  • Ignores quality changes in products
• What is an alternative to the CPI for measuring inflation?

  Producer Price Index (PPI)
• What does "demand-pull inflation" refer to?

  Inflation caused by increased demand for goods
• What does "cost-push inflation" refer to?

  Inflation caused by rising costs of production
• How can demand-pull inflation be illustrated on a diagram?

  • Shift of the demand curve to the right
  • Increase in equilibrium price level
  • Potential increase in quantity supplied
• How can cost-push inflation be illustrated on a diagram?

  • Shift of the supply curve to the left
  • Increase in equilibrium price level
  • Potential decrease in quantity demanded
• What are two impacts of inflation on firms?

  Increased costs and reduced purchasing power
• What are two impacts of inflation on consumers?

  Decreased purchasing power and increased prices
• What are two impacts of inflation on the government?

  Increased costs for public services and potential tax adjustments
• What are two impacts of inflation on workers?

  Reduced real wages and potential job insecurity
• What does "anticipated inflation" mean?

  Inflation that is expected and planned for
• What does "unanticipated inflation" mean?

  Inflation that occurs without prior expectation
• What are three factors that the impact of inflation may depend on?

  Income levels, savings, and investment strategies
• Why might deflation be beneficial?

  It can increase purchasing power for consumers
• What are four drawbacks of deflation?

  • Reduced consumer spending
  • Increased real debt burden
  • Lower business profits
  • Potential for economic recession