Exam code: 0455 & 0987
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Define inflation.
Inflation is the sustained increase in the general price level of goods and services in an economy.
What does the Consumer Price Index (CPI) measure?
The Consumer Price Index (CPI) measures inflation by tracking changes in the general price level of a basket of goods and services over time.
Define inflation rate.
The inflation rate is the percentage change in the general price level of goods and services in an economy over a given time period.
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Define inflation.
Inflation is the sustained increase in the general price level of goods and services in an economy.
What does the Consumer Price Index (CPI) measure?
The Consumer Price Index (CPI) measures inflation by tracking changes in the general price level of a basket of goods and services over time.
Define inflation rate.
The inflation rate is the percentage change in the general price level of goods and services in an economy over a given time period.
How is the inflation rate calculated using the CPI?
The inflation rate is calculated as the percentage difference in the CPI between two years.
True or False?
The basket of goods used for the CPI remains exactly the same every year.
False.
Each year, some goods and services are removed from the basket and new ones are added to better reflect average household spending.
Define weighting in the context of the CPI.
Weighting refers to the proportion of household spending attributed to each good or service in the CPI basket, reflecting its relative importance.
What is deflation?
Deflation is a fall in the general price level of goods and services in an economy, occurring when the percentage change in prices falls below zero percent.
True or False?
Low inflation is worse than no inflation for an economy.
False.
Low inflation is generally considered better than no inflation, as it is a sign of economic growth.
Define demand-pull inflation.
Demand-pull inflation is when the general price level rises due to an increase in total (aggregate) demand in the economy.
Define cost-push inflation.
Cost-push inflation is when the general price level increases due to higher costs of production.
Define imported inflation.
Imported inflation occurs when rising prices of imports increase the overall price level in the domestic economy.
What are the four components of aggregate demand (AD)?
The four components of aggregate demand (AD) are consumption, investment, government spending, and net exports (C + I + G + X - M).
When the Central Bank lowers the base rate, it encourages and , which can lead to demand-pull inflation.
When the Central Bank lowers the base rate, it encourages borrowing and spending, which can lead to demand-pull inflation.
Explain how a rise in the price of imported oil can lead to cost-push inflation.
A rise in the price of imported oil increases production costs for firms, causing them to raise prices. This leads to cost-push inflation.
Inflation reduces the power of money, meaning that each unit of currency buys goods and services.
Inflation reduces the purchasing power of money, meaning that each unit of currency buys fewer goods and services.
How does inflation affect savers and borrowers?
Inflation decreases the value of savings so savers lose out, while borrowers benefit as they repay loans with money that is worth less than when borrowed.
Firms may face increased costs due to inflation, as they have to change prices more frequently.
Firms may face increased menu change costs due to inflation, as they have to change prices more frequently.
True or False?
A moderate level of inflation is usually considered beneficial for economic growth.
True.
Governments often target 2-3% inflation as it is a sign of economic growth.
Define demand-pull inflation.
Demand-pull inflation is a rise in the general price level caused by an increase in total (aggregate) demand for goods and services in an economy.
Which type of policies are most effective at addressing demand-pull inflation?
Contractionary demand-side policies, such as contractionary fiscal and monetary policy, are most effective at addressing demand-pull inflation.
Define contractionary monetary policy.
Contractionary monetary policy is a policy where the Central Bank raises interest rates or reduces the money supply to decrease aggregate demand and control inflation.
How does increasing personal income tax help reduce inflation?
Increasing personal income tax reduces households’ discretionary income, leading to lower consumption, which decreases national output and helps to reduce inflation.
True or False?
Demand-side policies are equally effective at reducing both demand-pull and cost-push inflation.
False.
Demand-side policies are more effective at reducing demand-pull inflation, but less effective at dealing with cost-push inflation.
Define supply-side policy.
A supply-side policy is any measure that aims to increase total supply (output) in the economy by reducing costs of production or improving productivity.
What is a potential conflict caused by contractionary demand-side policies when used to reduce inflation?
Contractionary demand-side policies can reduce output and employment, potentially increasing unemployment while reducing inflation.
Why are supply-side policies not suitable for dealing with short-term inflation caused by high demand?
Supply-side policies are long-term measures and are too slow to address short-term inflation caused by demand-side pressures.