Answer these questions.Put missing words and match question to answer

Inflation: what causes it and what are its costs? I. Fill in the missing words Inflation is a rise in the general price level. It is generally measured in percentage terms; the Bank of England's Policy Committee aims for an inflation target of using the , CPI. There are two main causes of inflation: demand-pull, when AD shifts to the , so rising expenditure drives up the price level, or inflation, when shifts to the left, and rising costs of are passed onto consumers in the form of higher prices. Sustained falls in the inflation rate are also possible and this is called2. Costs of inflation - match each question with one of the answers in the opposite column. Question Answer 2.1 Menu costs are: A When the opportunity cost of holding cash increases and so people will keep more money in interest-bearing accounts, making more trips to the bank necessary. 2.2 Uncertainty and B Exports become relatively more expensive and imports lower investment as: relatively cheaper. The trade position will therefore deteriorate, unless the exchange rate deteriorates to compensate, other countries have higher inflation, or exports do not sell on the basis of price alone. 2.3 A wage price spiral C Inflation changes make it harder for firms to predict costs and occurs as: revenues and so they may be deterred from investment projects. 2.4 A fall in D those on fixed incomes, such as pensioners, see real incomes competitiveness as: fall, and the real value of their savings also fall. Furthermore, borrowers benefit as the real value of debt is eroded. 2.5 Shoe-leather costs E The costs due to reprinting price tags, catalogues, altering are: vending machines etc as prices become out of date. 2.6 Income is F Consumer sovereignty relies on producers responding to redistributed as: changes in prices. Inflation means that producers may believe that demand for their good has risen (and hence increase production) when, in fact, only the general price level has increased, causing allocationinefficiency. 2.7 Inefficient allocation G When workers bid for higher wages as they find their real of scarce resources income have been eroded by rising prices. This can lead to as: cost-push inflation and then demand for higher wages again, causing further inflation