Inflation

Question 1

What is the consumer price index (CPI)

Answer 1

A measure of the cost of living for the typical household, and compares the value of a basket of goods and services in one year with the value of the same basket in a base year

Question 2

How is inflation rate measured?

Answer 2

As a percentage change in the value of the basket from one year to another

Question 3

3 reasons why low and stable inflation is desirable

Answer 3

• Higher level of investment spending is encourages as companies can predict future revenues and costs with less uncertainty
• Export competitiveness is maintained so trade deficits do not widen creating BOP problems.
• (deflation) if prics are not maintained, a deflationary gap may occur with a decrease in economic activity and/or higher unemploymentand/or bankruptcies

Question 4

5 Functions of a country’s central bank

Answer 4

• conducting monetary policy
• regulator and banker to the commercial panks
• holder of foreign exchange reserves
• conducting exchange rate policy
• banker to the government