Inflation

Question 1

Define Inflation.

Answer 1

• Is a sustained rise in the cost of living and average price level.

Question 2

What 2 Factors directly cause inflation?

Answer 2

• Demand Pull (Rising AD) - Cost Push (SRAS shift left) - High inflation expectations

Question 3

What causes Demand Pull Inflation?

Answer 3

• Interest rate cut - Rising Wages - Increased confidence - Increased money supply

Question 4

What causes Cost Push inflation?

Answer 4

• Rising Oil Prices - Rising Wages - Higher Taxes - Devaluation (rising import prices)

Question 5

How does inflation affect the value of money?

Answer 5

Leads to a decline in the value of money

Question 6

What is the inflation rate?

Answer 6

Is the annual percentage change in price level

Question 7

How is inflation measured?

Answer 7

Through government statistics such as: - RPI (Retails Price Index) - CPI (Consumer Price Index)

Question 8

Define Deflation.

Answer 8

• Is a fall in the price level of the economy. It means there will be a negative inflation rate.

Question 9

What is the link with inflation and purchasing power of money?

Answer 9

Inflation means price of goods rise, therefore, the same amount of money will purchase a smaller quantity of goods.

Question 10

What is Hyper Inflation?

Answer 10

• Is generally considered to occur when inflation is greater than 1000%.

Question 11

What happens to the value of money with Hyper Inflation?

Answer 11

• Money loses its value so rapidly that nobody wants to use it as a medium of exchange.

Question 12

What are the Economic Costs of Inflation?

Answer 12

• Decline in value of savings - Uncertainty for business leading to less investment. - A decline in the competitiveness of exports (if inflation higher than other countries.)

Question 13

What is Demand Pull inflation?

Answer 13

• Is when the economy is at FULL EMPLOYMENT - Increase in AD leads to an increase in price level - When firms hit full capacity they respond by putting up prices. - CAUSING INFLATION

Question 14

How does demand pull inflation affect spending power of consumers?

Answer 14

• Near full employment means there are LABOUR SHORTAGES. - Workers can then get pay increases which increases their spending power.

Question 15

Graph showing Demand Push inflation.

Answer 15

Question 16

How can Aggregate Demand increase??

Answer 16

• By an increase in any one of its components
• C+I+G+X-M

Question 17

When do we tend to get Demand Pull inflation?

Answer 17

If economic growth is above the long-run trend rate of growth.

Question 18

What is the long-run trend rate of economic growth?

Answer 18

• is the average sustainable rate of growth and is determined by the growth in productivity.

Question 19

What is Cost Push Inflation?

Answer 19

If there is an increase in the COSTS of firms, then businesses will pass this on to consumers. There will be a shift to the left in the AS.

• All to do with SUPPLY

Question 20

Diagram showing how cost push inflation works when there is an increase in the cost for firms.

Answer 20

Question 21

How does Rising Wages affect cost push inflation?

Answer 21

• If trade unions can unite together and create movement they can bargain for higher wages.
• Rising wages causes cost puch inflation because wages are businesses biggest costs
• Higher wages may also contribute to rising demand.

Question 22

How does import prices affect cost push inflation?

Answer 22

• If there is devaluation then import prices become more expensive leading to an increase in inflation

Question 23

How does Raw Material Prices affect Cost Push Inflation?

Answer 23

• Best example is OIL
• Affects company costs

Question 24

How does Profit Push Inflation affect Cost Push Inflation?

Answer 24

• When firms push up prices to get higher rates of inflation.
• T his is more likely to occur during strong economic growth.

Question 25

How does Declining Productivity cause Cost Push Inflation?

Answer 25

- If firms become less productive and allow costs to rise, this invariably leads to higher prices.

Question 26

How does Higher Taxes cause Cost Push Inflation?

Answer 26

- If the government put up taxes - This will lead to higher prices, and therefore CPI will increase.

Question 27

Evaluative point for how Higher Taxes causes Cost Push Inflation?

Answer 27

- However, these tax rises are likely to be one-off increases

Question 28

How could Rising House Prices cause Inflation?

Answer 28

- Rising House Prices does not directly affect inflation - But cause a positive wealth affect and encourage consumer lead economic growth - This can indirectly cause demand-pull inflation

Question 29

How does Printing more Money cause inflation?