Questions and Answers
What is the effect of inflation on the purchasing power of money?
What type of inflation occurs when there is excess demand for goods and services?
What is the difference between nominal and real interest rates?
What type of inflation occurs when a rise in production costs is passed on to consumers in the form of higher prices?
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Which of the following is a characteristic of inflation?
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What happens to the burden of debt repayments during a period of inflation?
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What is the effect of high inflation on fixed-income earners?
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Why does investment fall when inflation is high?
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What happens to the purchasing power of savings if the inflation rate is greater than the interest rate?
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Why do workers seek wage increases during a period of inflation?
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Study Notes
Inflation and Misleading Advertisement
- A booking was made from August 29th to September 3rd at EasySleep Gaudi Terrace
- The booking was made without knowledge of a vital age restriction policy
- The age restriction policy states that individuals below 25 are not allowed
- This policy was not clearly communicated in the property description
- The only mention of the age restriction was found in the house rules
- A charge of €283.50 was made to the booker without awareness of the age restriction
- The booker is requesting a refund of €283.50 due to misleading advertisement
Inflation
- Inflation is a gradual increase in the general level of prices, resulting in a reduction of the purchasing power of money.
Types of Inflation
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Demand-pull inflation occurs when aggregate demand for goods and services exceeds aggregate supply, leading to excess demand and a subsequent increase in price levels.
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Cost-push inflation occurs when an increase in production costs is passed on to consumers in the form of higher prices.
Interest Rates
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Nominal Interest Rate is the interest rate before adjusting for inflation.
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Real Interest Rate is the interest rate adjusted to account for inflation.
Economic Effects of Inflation
- Inflation reduces the purchasing power of money, leading workers to seek wage increases to maintain their standard of living.
- Fixed-income earners, such as those on Job Seekers allowance, suffer a reduction in their standard of living due to inflation.
- Inflation reduces the burden of debt repayments, as the money used to pay back a loan has less value than the money initially borrowed, making borrowing more attractive when inflation is high.
- High inflation discourages investment, as it creates uncertainty about future production costs, making it difficult for new firms to start up or for existing firms to expand.
- Inflation reduces the purchasing power of savings if the inflation rate exceeds the interest rate, with the nominal interest rate being the rate before inflation and the real interest rate being the interest rate adjusted for inflation.
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Description
A customer booked a stay with EasySleep Gaudi but discovered an age restriction not clearly mentioned in the property description. They're seeking a refund of €283.50.