20 - Macroeconomics objectives - Low and stable rate of inflation

Question 1

Inflation

Answer 1

The sustained rise in the general price level in an economy over time, rise in average price over time

Question 2

Price stability

Answer 2

When the general level of prices remains largely constant due to a low and stable rate of inflation in the economy

Question 3

Hyperinflation

Answer 3

Very high and uncontrollable rates of inflation that causes seroius macroeconomic problems

Question 4

Measuring the inflation rate

Answer 4

Consumer Price Index (CPI) - A weighted index of average consumer prices of goods and services over time, used to measure inflation (or changes in the cost of living) for the average household in the economy.
* Most common way to measure inflation
* An increase in the CPI (inflation) = a fall in the purchasing power of money in the economy

Question 5

Limitations of the CPI in measuring inflation

Answer 5

• Atypical households
  
  • Only considers the expenditure of the ‘average’ household
    
    • Average pensioner or full-time unversity student will have different spending habits from a ‘typical’ family household
• Regional and international disparities
  
  • Prices can vary enourmously between countries making international comparions difficult
    
    • e.g. housing costs in Hong Kong and Singapore (high) compared to Hungary or Scotland (affordable)
• Different income earners
  
  • People on different levels of income can experience a different rate of inflation
    
    • High-income earners and wealthy households are less sensitive to changes in prices
    • Low-income individuals and households are far more affected by inflation
• Changes in product quality
  
  • CPI ignores changes in the quality of goods and services over time
    
    • Producers of televisions, computers, cars, etc. might charge higher prices for products, but the higher specifications and build quality are not reflected in the calculation of the CPI
• Different patterns of consumption over time
  
  • CPI can give a misleading or inaccurate representation of inflation over time as the patterns of consumption changes over time
• Time lags
  
  • Inflation figures and calculations may not accurately reflect changes in consumption patterns due to time lags in collecting data to compile the CPI
• Volume or value or quantities purchased

Question 6

Causes of inflation

Answer 6

• Demand-pull inflation
• Cost-push inflation

look at graphs, memorize them

Question 7

Costs of high inflation rate

Answer 7

REUSER:
- Redistributive effects
- Export competitiveness
- Uncertainty
- Saving
- Economic growth
- Resource allocation

Look at notes for details

Inflation → decline in real purchasing power of households, firms and governments

Question 8

Causes of deflation

Answer 8

• Benign deflation
• Malign deflation

look at graphs, memorize them from notion notes

Question 9

Deflation

Answer 9

The persistent fall in the average price level in an economy over time, that is, lower prices in general

Question 10

Disinflation

Answer 10

A fall in the rate of inflation, the prices are still rising, but at a slower pace (e.g. 5% → 2%)

Question 11

Costs of deflation

Answer 11

R U CUPID:
- Redistributive effects
- Uncertainty
- Consumption being deffered
- Unemployment and bankruptcies
- Policy ineffectiveness
- Inefficient resource allocation
- Debt