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econ 2.1.2 - Coggle Diagram
econ 2.1.2
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limitations of CPI
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Time lags: The CPI is slow to respond to new products in markets – the CPI basket is changed each year but only by a little.
The CPI basket is not fully representative of all consumers - it will be inaccurate for non-typical households
causes of inflation
cost push: occurs when businesses respond to rising unit costs by increasing prices to protect their profit margins
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SRAS shifts left, LRAS doesn't move, AD doesn't move
growth of the money supply: Monetarism suggests that the amount of money in an economy plays a crucial role in determining the overall price level, or inflation. If the central bank increases the money supply too rapidly, it can lead to inflation because there is "too much money chasing too few goods.”
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deflation - Deflation is a sustained period when the general price level for goods and services is falling
disinflation - a slowdown or a fall in the annual rate of price inflation (prices still rising but more slowly)
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A Consumer Price Index (CPI) is a measure that tracks changes in the average price level of a basket of goods and services purchased by a typical household over time
CPI is calculated by comparing the current prices of the items in the basket to the prices of the same items in a base year or period.
Retail Price Index is also used to measure inflation based on the percentage change in the cost of a basket of retail goods and series. However, RPI includes more variables-‐ such as council tax and mortgage interest repayments, which the CPI does not.