Inflation: key terms
15 terms. Say the definition out loud, tap to check, then say whether you knew it. Back to the topic
These cards were written by the site from the specification, mark schemes and examiners' reports and are being checked by our Economics tutor; tell us if you spot an error.
Inflation
A sustained rise in the general price level over time, which reduces the purchasing power of money.
Examiners say Say 'general price level' and 'sustained': a rise in one price, or a one-off rise, is not inflation. The one-mark definition is set regularly.
Price level
The average level of prices of goods and services in an economy at a point in time, usually measured by an index such as the CPI.
Examiners say Many students could not define this when it was asked alone. It is the level; the inflation rate is its rate of change.
Inflation rate
The percentage change in the price level over a period, usually a year, calculated from the change in a price index.
Examiners say The four-mark version asked for the term and a reference to the figure: give the definition, then quote a number from the chart with its date.
Deflation
A sustained fall in the general price level, a negative rate of inflation.
Examiners say Not the same as disinflation. Reports flag the confusion every time either is set.
Disinflation
A fall in the rate of inflation: prices are still rising but more slowly.
Examiners say The level-versus-rate distinction is one of the twelve quantitative skills and is tested here most often.
Consumer Prices Index (CPI)
The UK's main measure of inflation: a weighted index of the prices of a representative basket of goods and services bought by households, compared with a base year of 100.
Examiners say The 'explain the process' question wanted the basket, the weights from the expenditure survey and the base year. Answers that only said 'a basket of goods' stopped at two marks.
Retail Prices Index (RPI)
An older UK price index that includes housing costs such as mortgage interest and council tax, and uses a different averaging method, so it usually runs above the CPI.
Examiners say Useful as a comparison point for the 'limitation of CPI' question, but say what the limitation is.
Index number
A figure that expresses a value as a percentage of its value in a base period, which is set at 100.
Examiners say Students confused the index number with the base year itself. Index for 2016 = (price in 2016 ÷ price in base year) × 100.
Base year
The reference period against which other values in an index are compared, given the value 100.
Examiners say Rebasing does not change the percentage changes, only the numbers.
Weights in a price index
The proportions used to give each item in the basket an importance that reflects its share of household spending, so that a rise in rent counts more than a rise in the price of salt.
Examiners say The weights, and the fact they are updated annually, are the detail that separates a full answer from a partial one.
Limitations of CPI
It is an average, so no household's experience matches it; it excludes owner-occupier housing costs; it is slow to reflect new products and quality changes; and substitution by consumers is not fully captured.
Examiners say Pick one limitation and develop it for three marks. Many students listed two or three without developing any.
Demand-pull inflation
Inflation caused by aggregate demand rising faster than the economy's capacity to supply, pulling prices up; shown as a rightward shift of AD along an upward-sloping AS curve.
Examiners say The credit-card lending question was a demand-pull chain: more borrowing, more consumption, higher AD, higher price level. Each link is a mark.
Cost-push inflation
Inflation caused by rising costs of production, such as wages, imported materials or indirect taxes, which shift the SRAS curve leftwards and raise the price level while reducing output.
Examiners say The exchange-rate question was cost-push: a weaker pound raises import prices, raising firms' costs. State the direction of the exchange-rate change first.
Growth of the money supply
An explanation of inflation in which a sustained increase in the quantity of money in the economy, faster than the growth of output, leads to a rising price level.
Examiners say The monetarist cause on the specification alongside demand-pull and cost-push; it appears in the indicative content of 'causes of inflation' questions.
Effects of inflation
Falling real incomes for those on fixed incomes, uncertainty that deters investment, loss of international competitiveness, menu and shoe-leather costs, and redistribution from savers to borrowers.
Examiners say Essay answers at Level 4 chose two or three effects and weighed them by who is affected and by how high and how expected the inflation is.
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