Inflation is the sustained increase of the general price level in an economy.
Q2. In which of the following situations is an economy suffering from disinflation?
A - The annual rate of inflation changes from 4% to 2.5%
B - The annual rate of inflation has changed from -2% to -1%
C - The annual rate of inflation is zero
D - The annual rate of inflation is constant
It is A because disinflation is a reduction of inflation, 2.5% is still inflation however it has decreased from 4%.
Q3. Explain why economists might be interested in the UK's core inflation rate
They may be interested in the UK's core inflation rate because it measures the underlying rate of inflation in the economy by excluding the short-term fluctuations. The Bank of England does not set a target for core inflation however it does for inflation which is 2%. Also if they know the core rate of inflation it helps them set a relevant policy.
Q4. In which of the following situations is an economy suffering from deflation?
A - The annual rate of inflation is falling from 4% to 2.5%
B - The annual rate of inflation has risen from 2% to 5%
C - The annual rate of inflation is zero
D - The annual rate of inflation is constant at -2%
It is D because deflation is the reduction of general price level in the economy.
Q5. Explain why governments try to avoid periods of deflation
Because consumers are likely to stop spending as they wait for prices to fall further, which would cause aggregate demand to drop resulting in firms reducing production and workers being made redundant, which will dramatically reduce real general price level.
Also if aggregate demand is suffering from deflation debts increase in value which may lead to further reduction of expenditure especially within the government.
Q6. Which of the following is an example of demand-pull inflation?
A - A rise in consumer confidence and the level of consumption
B - A rise in price of wheat
C - A rise in average real wages
D - A rise in the rate of inflation in a major trading partner
It is A and also C as the consumer is demanding more due to their situation rather than lower prices or something to do with the firm.
Q7. Explain how a depreciation in the value of the pound might result in demand-pull inflation
If the pound depreciates in value imports will become more expensive so fewer imports are purchased therefore demand for local goods and services increases which will cause and increase in aggregate demand which will lead to inflation as more is demanded. On the other side, UK exports become cheaper as the pound depreciates so more exports are sold which again increases aggregate demand from overseas. This can happen because of the increase in globalisation.
Q8. Explain the effects of a sustained fall in real wages, such as that experienced in the UK recently, on the rate of inflation
Real wages are different to wages because they have been adjusted for inflation/deflation. If your wage drops it maybe be because the economy is experiencing a deflation so even though you're getting less money, things will be becoming cheaper so you wont feel as if you are poorer. However, if your real wage drops it is already adjusted for inflation/deflation so you will feel worse off. If real wage drops people will start spending less and buying fewer luxury items which will lead to a fall in aggregate demand therefore decreasing inflation.
Q9. Explain why changes in the prices of commodities such as wheat and oil can have a significant impact on the rate of inflation in the UK
If the prices of commodities goes up then the costs for firms also increases which will lead to higher prices as firms try to keep their profits up. By increasing prices this could lead to people not buying their good/service leading to a fall in aggregate demand which will lead to the rate of inflation decreasing.
Q10. Explain the possible effects of the growth of emerging economies such as China ans Brazil on the rate of inflation in the UK
Emerging markets such as China and Brazil have increased globalization making international trade easier and with fewer barriers. For example the Chinese economies growth has been based on the large supple of low-cost labour which means they can manufacture goods cheaply. This has contributed to falls in real prices of many consumer products which has helped to keep inflation low. However, rising demand for globally traded products can lead to rises in price as supply decreases due to the scarcity of resources (one of the economics problems). These products include minerals and food which we are not able to produce ourselves. This has the potential to increase inflation in the UK as prices rise and more imports are required.
