What is inflation?
a general increase in prices and fall in the value of money
How is inflation measured?
- the cost of a typical basket of goods is calculated- the difference in price for these goods, from 1 year to the next, gives the rate of inflation
What is the consumer price index? (CPI)
a weighted basket of goods, which measures the monthly change in the prices of over 700 different goods/services
How is CPI calculated?
family expenditure survey- approx 7000 households are used to find out typical consumption patterns to help create statistics
What is deflation?
a decrease in the general level of prices
What is disinflation?
a reduction in the rate of inflation
Explain what happens to price during supply and demand
- high demand but low supply = price increase- low demand but high supply = price decrease
How is the PUSH factor cost a cause of inflation?
rising cost of inputs, materials, commodities etc force producers to charge higher prices to consumers or make less profit
How is the PULL factor demand a cause of inflation?
rising demand of goods/services causes sellers to increase their prices
What is the ideal rate of inflation?
2%
What can the monetary policy committee do to interest rates to control inflation?
increase interest rates which discourages people from spending money
What are some effect of inflation on businesses?
- increased costs of supplies as prices are increasing- cutback on investments (reduced expansions so no growth in economy)- less exports