3. Economic issues - Inflation (Price Stability)

Question 1

Inflation is…

Answer 1

a SUSTAINED increase in the general level of prices, over time.

Question 2

Optimum inflation

Answer 2

between 2 and 3% to achieve the goal of price stability

Question 3

CPI stands for

Answer 3

Consumer price index

Question 4

The CPI measures…

Answer 4

CPI measures the changes in prices in a selected number of consumer goods and services over time.

Question 5

Formula for measuring inflation

Answer 5

(later CPI - Earlier CPI) / earlier cpi x100

Question 6

Headline inflation rate is…

Answer 6

The quarterly change in CPI

Question 7

The CPI contains weightings for…

Answer 7

Housing / Food and non alcoholic beverages / recreation / Transport / furnishing / alcohol and tobacco / health…

Question 8

Underlying inflation rate…

Answer 8

removes “one-off” / seasonal / volatile factors
Examples include higher food prices due to cyclones / floods/ droughts

Question 9

Inflation rate trends

Answer 9

during re sources boom (2006-08) - 4.3%
After GFC - 1.5%
During june quarter of covid-19 : -1.9%

Question 10

Causes of inflation

Answer 10

growth in aggregate demand - Demand pull
Aggregate supply restricted or decreased - cost push

Question 11

Common causes of cost push inflation

Answer 11

Common causes of cost-push inflation are wage increases, higher costs of raw materials or other increases in inputs.

Question 12

Effect of inflation on consumers

Answer 12

loss of purchasing power and real income

Question 13

Effect of inflation on Workers

Answer 13

decline in real incomes

Question 14

Effect of inflation on producers

Answer 14

will react by putting up prices

Question 15

Effect of inflation on exporters

Answer 15

decrease due to a decline in international competitiveness

Question 16

Effect of inflation on savers

Answer 16

If interest rates do not keep up with inflation, the real value of savings will decrease

Question 17

Effect of inflation on Investors

Answer 17

the higher cost of borrowing will reduce the demand for loans

Question 18

Effect of inflation on government

Answer 18

cost of providing goods and services will rise

Question 19

If inflation targets are not met

Answer 19

• Fall in purchasing power ; Redistribution of income to those receiving profits and dividends ; A loss in international competitiveness ; A reduction in savings and investment ; If inflation is caused by wage increases, a rise in unemployment ; A worsening of government budget

Question 20

Positive of inflation

Answer 20

Asset prices rise, which increases the wealth of asset owners

Question 21

POLICIES TO REDUCE INFLATION

Answer 21

• Contractionary monetary policy
• Contractionary fiscal policy

Question 22

MICROECONOMIC REFORM to prevent inflation

Answer 22

• Competition policy: promotion of increased competition can reduce prices.
• Tariff reform, including the removal/reduction of tariffs, can help lower prices
• Removal of indirect taxes
• Increasing the efficiency of PTEs to lower prices
• Introducing enterprise bargaining to link wage growth with productivity growth