Inflation SAQ

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

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

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

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

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

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

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

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

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

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

<p>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.</p> Signup and view all the answers

<p>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.</p> Signup and view all the answers

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

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

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

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

<p>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.</p> Signup and view all the answers

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

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