13 Questions
What is inflation in the context of economics?
A sustained increase in the general price level of goods and services
What happens when the overall price level rises?
Each unit of currency buys fewer goods and services
What is the usual measure of inflation?
Percentage increase in the Consumer Price Index (CPI)
What is demand-pull inflation caused by?
An excess of aggregate demand over supply
What is an example of a scenario that could lead to demand-pull inflation?
An increase in government spending or a decrease in taxes
What is cost-push inflation caused by?
An increase in the cost of production
What is a consequence of a sustained increase in the general price level of goods and services?
The purchasing power of each unit of currency decreases
What is a common characteristic of both demand-pull and cost-push inflation?
They both result in higher prices
Which of the following is NOT a direct cause of demand-pull inflation?
Rise in oil prices
What is a potential consequence of cost-push inflation?
Businesses pass on the increased costs to consumers
What is the name of the index used to measure the rate of inflation?
Consumer Price Index (CPI)
When does demand-pull inflation occur?
When aggregate demand exceeds aggregate supply
What is an example of a scenario that could lead to cost-push inflation?
A rise in oil prices
Study Notes
Inflation
- Sustained increase in the general price level of goods and services in an economy over a period of time
- Each unit of currency buys fewer goods and services when the overall price level rises
- Measured as a percentage increase in the Consumer Price Index (CPI) over a given period (e.g., annually or monthly)
Causes of Inflation
Demand-Pull Inflation
- Occurs when aggregate demand for goods and services exceeds aggregate supply
- Excess demand leads to higher prices as suppliers increase prices to balance the demand-supply gap
- Examples:
- Government increases public spending
- Government lowers taxes, resulting in people having more money to spend
Cost-Push Inflation
- Results from an increase in the cost of production for businesses
- Businesses pass on increased costs to consumers in the form of higher prices
- Examples:
- Rise in oil prices, increasing the cost of production for goods that rely on oil
Inflation
- Sustained increase in the general price level of goods and services in an economy over a period of time
- Each unit of currency buys fewer goods and services when the overall price level rises
- Measured as a percentage increase in the Consumer Price Index (CPI) over a given period (e.g., annually or monthly)
Causes of Inflation
Demand-Pull Inflation
- Occurs when aggregate demand for goods and services exceeds aggregate supply
- Excess demand leads to higher prices as suppliers increase prices to balance the demand-supply gap
- Examples:
- Government increases public spending
- Government lowers taxes, resulting in people having more money to spend
Cost-Push Inflation
- Results from an increase in the cost of production for businesses
- Businesses pass on increased costs to consumers in the form of higher prices
- Examples:
- Rise in oil prices, increasing the cost of production for goods that rely on oil
Understand the concept of inflation, its causes, and effects on the economy. Learn about demand-pull and cost-push inflation, and how it's measured.
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