3.3 Inflation and Economic Modes Flashcards
What is inflation
The rate of increase in the price of goods and services.
Australia’s inflation figures:
2021 - 3.5%
2022 - 7.8%
2023 - 4.1%
Summary of Inflation
Inflation is another important measure of economic performance.
As prices increase, consumer spending power decreases -> Living standards fall
Increases in local prices also make it difficult for Australian businesses to sell overseas.
What is CPI
CPI is the measure used in Australia to gauge the level of inflation.
It is measured by calculating the average percentage price increases of a ‘basket’ of consumer items typically used by Australian households.
CPI figures are compiled by the Australian Bureau of Statistics (ABS).
What is ‘Interest Rate
An interest rate is the percentage of the principal amount that a lender charges a borrower for the use of its money. The interest rate reflects the cost of borrowing money or the reward for saving money. It can affect the economy by influencing the level of spending and investment.
How do interest rates affect Australian Households
Rising interest rates increase the cost of borrowing and the repayments on existing loans, such as mortgages, car loans, and credit cards. This reduces the disposable income and purchasing power of households and may affect their ability to service their debt and meet their financial obligations.
Rising interest rates also increase the return on saving and investing, such as bank deposits, bonds, and shares. This may encourage households to save more and spend less.
What is the difference between a fixed mortgage rate and a variable mortgage rate
The difference between a fixed mortgage and a mortgage with a variable interest rate is that a fixed mortgage has a constant interest rate and monthly payment for the entire term of the loan (1 mark) while a variable interest rate mortgage has an interest rate and monthly payment that can change over time, depending on market conditions and the lender’s policy (1 mark).
Explain the relationship between rising intrest rates and inflation
nterest rates are the main tool that central banks use to control inflation, which is the increase in the average level of prices of goods and services over time.
When inflation is high or rising, central banks may increase interest rates to reduce the demand and supply of money in the economy.
Higher interest rates make borrowing more expensive and saving more attractive, which discourages spending and investing by consumers and businesses. This lowers the pressure on prices and slows down the inflation rate.
what is interventionalist economics?
Interventionism: Supports active government involvement in managing the economy, particularly to address market failures and promote stability.
what is classical economics
Classical Economics: Advocates for a self-regulating economy with limited government intervention.
what is monetarism economics
Monetarism: Focuses on controlling the money supply to manage inflation, with minimal government intervention.
