Inflation

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Why might the CPI overestimate inflation?

Because it ignores improvements in product quality and consumer substitution.

What diagram shows demand-pull inflation?

An AD/AS diagram with AD shifting rightward.

What is demand-pull inflation?

Inflation caused by an increase in aggregate demand.

How can deflation affect debt levels?

It increases the real value of debt, making it harder for borrowers to repay.

How can inflation affect savers?

It erodes the purchasing power of their savings if interest rates are lower than inflation.

If bread has a price increase of 10% and a weight of 15%, what is its contribution to overall inflation?

1.5%

What is deflation?

A sustained decrease in the general price level of goods and services.

What causes deflation?

A fall in aggregate demand or an increase in aggregate supply.

List three effects of high inflation on the economy.

Uncertainty, reduced competitiveness, and redistribution of income.

What diagram shows cost-push inflation?

An AD/AS diagram with SRAS shifting leftward.

What is a weighted price index?

An index where each item is given a weight based on its relative importance in consumer spending.

What is the main limitation of the CPI?

It may not reflect the consumption patterns of all households, and it ignores quality changes and substitution effects.

List two causes of cost-push inflation.

Higher wages and increased prices for imported raw materials.

Why is inflation a problem for exporters?

It can make exports more expensive, reducing international competitiveness.

If a product price rose from $400 to $440, what is the inflation rate for that item?

10%

What is disinflation?

A fall in the rate of inflation, meaning prices are rising more slowly.

What is cost-push inflation?

Inflation caused by an increase in production costs, such as wages or raw materials.

How do you calculate the inflation rate from CPI data?

(CPI new - CPI old) ÷ CPI old × 100

What is the inflation rate if the CPI rises from 120 to 126 over one year?

What does the Consumer Price Index (CPI) measure?

The average change in the prices of a basket of goods and services typically consumed by households.

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