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Inflation is commonly understood to be the percentage change in the general level of prices in
an economy over a period of time. RPI is a measure of inflation, calculating changes in the
level of prices paid by consumers over time.

How a price index number is calculated:


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Lager £1.20 £1.80 150 30 4500
Total 630 100 134.75

Average 126 134.75

The index for each product is multiplied by the percentage of income spent on it. The price
change for petrol is four times as important as the price change of crisps. The total is divided
not by…

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A host of other index numbers can be calculated. In order to predict movements in the RPI
sometime in the future, it is worth looking at:
The Producer Price Index ­ this shows changes in the prices of raw materials bought
by firms. If these increase, they will affect retail…

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As AD increases, at first, the economy is able to meet the extra demand placed upon it, but
as full employment is approached, demandpull inflation starts to be caused. Once full
employment is reached, the effect of any increase in demand is purely inflationary. The
inflationary gap is the distance…

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A rise in the price of oil would lead to higher petrol prices and higher transport
costs. All firms would see some rise in costs. As the most important
commodity, higher oil prices often lead to cost push inflation.
2. Imported inflation
Devaluation will increase the domestic price of imports.…

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It is not always possible to distinguish between cause and effect (i.e. cause being
inflation, but inflation can be the effect too)
Issues with time lags i.e. by the time we identify it, it may be outdated.

The Quantity Theory of Money

Inflation may be defined as an increase in…

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If V falls when the money supply (M) rises, or if more money is accompanied by more
goods to buy (more T), an increase in M need not lead to an increase in prices.
o How can P rise without an increase in M?
The price level will rise without…

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The impact of QE on inflation is unclear. If we look at a more broad definition of money, the
effect on QE should be small (as one asset is swapped for a more liquid one). A more
narrow definition may give a different answer, as the process of QE has…

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Money supply

Ways to combat inflation

1. Monetary Policy

Control growth of demand through interest rates. IR affects consumption, investment,
and exports. The wealth effect plays an important part with regards to consumption.
Control IR controls money supply, as it is the amount consumers pay for money. If IR

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4. Appreciation of the exchange rate

Appreciation makes UK exports more expensive (the pound is stronger, while other
currencies weaken).
Imports become cheaper, an increase in ER should appreciate the pound (assuming
IR is higher than competing countries). As we import a great deal, this should reduce
COP, which will…




This is a 9 page summary on what inflation is, how it is calculated, causes of it and some possible methods of dealing with it. A good set of notes which students can adapt for their own purposes.

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