chapter 8

Question 1

Inflation definition

Answer 1

sustained increase in general price levels (GPL)

Question 2

Deflation definition

Answer 2

sustained decrease in GPL

Question 3

Types of Inflation

Answer 3

• cost-push
• demand-pull

Question 4

Measurement of Inflation

Answer 4

• consumer price index
• producer price index
• GDP deflator

Question 5

Factors of Cost-Push Inflation

Answer 5

• import price push
• increase in structural rigidities
• wage push
• currency depreciation
• supply-side shocks
• profits push

Question 6

Factors of Demand-Pull Inflation

Answer 6

• C
• I
• G
• (X-M)

Question 7

Effects of Inflation

Answer 7

effects on internal stability :
- internal macroeconomic goals
- on resource allocation
- welfare

effects on external stability :
- balance of trade (BOT)
- external value of currency

Question 8

Effects of inflation is dependent on :

Answer 8

• whether inflation is expected
• extent of inflation
• relative inflation rates

Question 9

Menu Cost Inflation

Answer 9

• the cost involved in constantly revising price lists due to price changes
• cost is incurred due to the need to reprint & re-issue their product catalogue, publicity material bar codes and/or menus

Question 10

Shoe-Leather Cost Inflation

Answer 10

• the time & effort people take to counteract the effects of inflation
• inflation reduces value of money
• households do not want to hold on to large sums of cash
• increase frequency of transactions results in greater time wastage

Question 11

Control of Inflation

Answer 11

• AD management policies
• AS management policies

Question 12

AD Management Policies

Answer 12

• monetary policy
• fiscal policy

Question 13

AS Management Policies

Answer 13

• market-oriented policies
  1. manpower policy
  2. pro-competition policy
• prices & income policies