Economics

Question 1

What is inflation?

Answer 1

Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. As inflation rises, every dollar you own buys a smaller percentage of a good or service.

Question 2

What is demand-pull inflation?

Answer 2

This theory can be summarized as “too much money chasing too few goods”. In other words, if demand is growing faster than supply, prices will increase.

Question 3

What are causes of demand-pull inflation?

Answer 3

1. Growing Economy
2. Expectation of Inflation
3. Discretionary Fiscal Policy
4. A Strong Brand
5. Technological Innovation

Question 4

How does growth in the economy create demand-pull inflation?

Answer 4

When families feel confident, they will spend more instead of saving. That means they expect to get raises and better jobs. They know their homes and other investments will increase in value.

Question 5

How does an expectation of inflation create demand-pull inflation?

Answer 5

Once people expect inflation, they will buy things now to avoid higher future prices. That increases demand, which then creates demand-pull inflation. Once expectation of inflation sets in, it is difficult to eradicate.

Question 6

How does discretionary fiscal policy create demand-pull inflation?

Answer 6

Government spending drives up demand. For example, military spending raises prices for military equipment. When the government lower taxes it also drives demand. That’s because consumers have more discretionary income to spend on goods and services. When that increases faster than supply, it creates inflation.

Question 7

How does a strong brand and strong marketing create demand-pull inflation?

Answer 7

Marketing can create high demand for certain products, a form of asset inflation. A great example is Apple products as prices for these goods are higher than comparable products.

Question 8

How does technological innovation create demand-pull inflation?

Answer 8

Technological breakthroughs allow companies to charge a premium for their products as they are “cutting-edge.” If they continue to innovate, they can retain higher prices over time.

Question 9

What is cost-push inflation?

Answer 9

When companies’ costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, raw materials, or increased costs of imports.

Question 10

When were monopolies outlawed?

Answer 10

Monopolies were outlawed in 1890 by the Sherman Anti-Trust Act.

Question 11

What are causes of cost-push inflation?

Answer 11

1. Monopolies
2. Wage Inflation
3. Natural Disasters
4. Government Regulation and Taxation
5. Shift in Exchange Rates

Question 12

How do monopolies affect cost-push inflation?

Answer 12

This has the same effect as the supply being extraneously reduced because the company controls the supply of that good or service.

Question 13

How does wage inflation affect cost-push inflation?

Answer 13

This is when wage earners have the power to force through wage increases, which companies then pass through to consumers in higher prices. This happened in the U.S. auto industry, when the labor unions were able to push for higher wages. Thanks to China and the decline of union power in the U.S., this has not been a driver of inflation for many years.

Question 14

How do natural disasters affect cost-push inflation?

Answer 14

A growing problem will be cost-push inflation as a result of the depletion of natural resources. Each year the price of many types of fish gets higher, thanks to overfishing.An oil refinery being destroyed would also rapidly increase prices.

Question 15

How does government regulation and taxation affect cost-push inflation?

Answer 15

Taxes on cigarettes and alcohol were meant to lower demand for these unhealthy products. This may have happened, but more important it raised the price, creating inflation.

Question 16

How does a shift in exchange rates affect cost-push inflation?

Answer 16

Any country that allows the value of its currency to fall will experience higher import prices. That’s because the foreign supplier does not want the value of its product to drop along with that of the currency. If demand is inelastic, it can raise the price and keep its profit margin intact.

Question 17

What is inelastic demand?

Answer 17

Inelastic demand in economics is when the quantity demanded by buyers doesn’t change as much as the price does. That typically occurs with goods or services that people need every day e.g. gasoline.

Question 18

What is creeping inflation?

Answer 18

Creeping or mild inflation is when prices rise 3% a year or less. According to the U.S. Federal Reserve, when prices rise 2% or less, it’s actually beneficial to economic growth. It sparks increased demand as consumers decide to buy now before prices rise in the future. By increasing demand, mild inflation drives economic expansion.

Question 19

What is walking inflation?

Answer 19

This type of strong, or pernicious, inflation is between 3-10% a year. It is harmful to the economy because it heats up economic growth too fast. People start to buy more than they need, just to avoid tomorrow’s much higher prices. This drives demand even further, so that suppliers can’t keep up. More important, neither can wages.

Question 20

What is galloping inflation?

Answer 20

When inflation rises to ten percent or greater, it wreaks absolute havoc on the economy. Money loses value so fast that business and employee income can’t keep up with costs and prices. Foreign investors avoid the country, depriving it of needed capital. The economy becomes unstable, and government leaders lose credibility.

Question 21

What is hyperinflation?

Answer 21

Hyperinflation is when the prices skyrocket more than 50% a month. It is fortunately very rare. In fact, most examples of hyperinflation have occurred when the government printed money recklessly to pay for war. Examples of hyperinflation include Germany in the 1920s, Zimbabwe in the 2000s, and during the American Civil War.

Question 22

What is core inflation?

Answer 22

The core inflation rate measures rising prices in everything except food and energy. That’s because gas prices tend to escalate every summer, usually driving up the price of food and often anything else that has large transportation costs. The Federal Reserve uses the core inflation rate to guide it in setting monetary policy. The Fed doesn’t want to adjust interest rates every time gas prices go up – and you wouldn’t want it to.

Question 23

What is deflation?

Answer 23

Deflation slows economic growth. Once people expect price declines, they delay purchases as long as possible. They know the longer they wait, the lower the price will be. This further decreases demand, causing businesses to slash prices even more. It is a vicious, downward spiral.

Question 24

What is the basic economic problem?

Answer 24

Scarce finite resources and infinite wants.

Question 25

What does a society have to decide as a result of the basic economic problem?

Answer 25

What goods to produce, how to make them and who should receive them.

Question 26

What are the four factors of production?

Answer 26

Land, labour, capital and entrepreneurship.

Question 27

What is the definition of opportunity cost?

Answer 27

The cost of the next best forgone alternative.

Question 28

What is a market economy?

Answer 28

Individuals own private property, consumers are free to choose what products they buy and privately owned firms compete against each other to make goods for profit.

Question 29

What is a planned economy?

Answer 29

The state owns the factors of production and all the decisions of what, how and for whom are made by the government.

Question 30

What is a mixed economy?

Answer 30

A mixture of a market and planned economy.

Question 31

What functions do prices serve?

Answer 31

Rationing, providing incentives and signalling.

Question 32

What are normative statements?

Answer 32

Subjective statements/opinions about what ought to be or what should be happening, they are said to carry value judgements.

Question 33

What are positive statements?

Answer 33

Objective statements that can be tested or rejected by referring to the available evidence.

Question 34

Why is inequality a significant failure of the market system?

Answer 34

It leads to the provision of luxuries for the rich before others have the basic necessities of life.