Inflation SAQ

What is inflation?

Inflation refers to a gradual increase in the general level of prices, which reduces the purchasing power of money.

What causes demand-pull inflation?

Demand-pull inflation occurs when the aggregate demand for goods and services exceeds aggregate supply, leading to higher prices.

Define cost-push inflation.

Cost-push inflation happens when a rise in the costs of production is passed on to consumers in the form of higher prices.

What is the nominal interest rate?

The nominal interest rate is the interest rate before taking inflation into account. Signup and view all the answers

How is the real interest rate different from the nominal interest rate?

The real interest rate is the nominal interest rate adjusted for inflation. Signup and view all the answers

List one cause of inflation related to rising incomes.

Rising incomes during periods of economic growth can increase demand for goods and services, causing demand-pull inflation. Signup and view all the answers

How do indirect taxes contribute to inflation?

An increase in indirect taxes can lead to higher prices for goods and services on which these taxes are levied. Signup and view all the answers

What effect does currency depreciation have on inflation?

Currency depreciation increases the cost of imports, which can lead to higher prices and inflatio Signup and view all the answers

What is deflation?

Deflation is a gradual fall in the general level of prices. Signup and view all the answers

Name one problem caused by deflation.

One problem caused by deflation is that consumer spending falls as people wait for prices to drop further, slowing down economic activity. Signup and view all the answers

How is the Consumer Price Index (CPI) measured?

The CPI is measured by pricing a basket of goods and services each month, applying weights to the spending of each category of item to reflect their importance. Signup and view all the answers

What is one use of the CPI?

One limitation of the CPI is that it is based on the spending pattern of the 'average' household, which may not reflect individual household spending. Signup and view all the answers

What role does the European Central Bank (ECB) play in price stability?

The ECB is responsible for maintaining the purchasing power of the euro, targeting an inflation rate of 2% over the medium term. Signup and view all the answers

What happens to the purchasing power of money during inflation?

The purchasing power of money decreases during inflation, as prices rise. Signup and view all the answers

How does inflation affect those on fixed incomes?

Inflation reduces the standard of living for those on fixed incomes, such as individuals receiving job seekers allowance. Signup and view all the answers

What is the impact of inflation on debt repayments?

Inflation reduces the burden of debt repayments because the money used to repay loans is worth less than when it was borrowed. Signup and view all the answers

Why does investment fall during high inflation?

Investment falls during high inflation because it creates uncertainty about future costs, making it difficult for new firms to start and existing firms to expand. Signup and view all the answers

How does inflation affect savings?

Inflation reduces the purchasing power of savings if the inflation rate is higher than the interest rate. Signup and view all the answers

Why might borrowed money be easier to repay during inflation?

Borrowed money might be easier to repay during inflation because the value of money decreases, reducing the real burden of debt. Signup and view all the answers