HEAT THE BASKET.
Shock one component of the CPI basket and watch the headline rate move, then push AD and SRAS around to see which kind of inflation you just made.
CPI · component heatmap
FIG. 01 · INFLATION · 2.2Pick a component in the basket, then drag its annual price change. The headline rate is the weighted mean — a big move in a small-weight item barely registers.
What the exam wants: 4.2.2 asks how CPI is constructed and why it can mislead. Every component here is weighted by household spending, so the headline rate is a weighted mean, not an average of the percentages. Strip out the volatile food and energy items and you get the underlying (core) rate the MPC watches — which is why the Bank can look through a headline spike caused by a one-off energy shock, and why it cannot look through a broad-based one.
Shock the economy
FIG. 02 · AD / AS · 2.3C + I + G + (X − M). Rate cuts, tax cuts, a confidence swing or a weaker pound all land here.
Positive is favourable — costs of production fall and SRAS moves right. Negative is an oil, wage or import-price shock.
At the long-run equilibrium.
What the exam wants: 4.2.3 marks the mechanism, not the picture. Name the shock, say which curve moves and in which direction, then read off both the price level and real output before you evaluate. Demand-pull (AD right) raises output and prices together; cost-push (SRAS left) raises prices while output falls — that is stagflation, and it is the case where the Bank cannot fix both objectives with one instrument. LRAS is vertical at the productive capacity of the economy, so only supply-side improvement moves the long-run position.