Inflation

Question 1

What are the main types and causes of inflation

Answer 1

Demand pull inflation (demand shift right)- occurs when aggregate demand grows while supply is at capacity, high prices in short term.
Cost push inflation (supply shift to left) - occurs when there is an increase in production costs that is passed on to consumers (wages, oil)

Question 2

What (not demand pull or cost push) can increase inflation

Answer 2

Inflationary expectations
Imported inflation
Govt. policies
Excessive increases in money supply

Question 3

What are the effects of inflation (8)

Answer 3

Economic growth and uncertainty
Wages - wage price inflationary cycle
Income distribution
Unemployment - phillips curve either high unemployment = low inflation and vice versa
International competitiveness
Exchange rate impacts
Interest rates
Reduced risk of deflation

Question 4

What are policies to sustain low inflation

Answer 4

Monetary policy - sustain economic growth to aim for 2-3% inflation
Pre emptive policy - Increase cash rate before inflation is a problem
Fiscal policy - e.g increase revenue and reduce spending to slow demand pull inflation
Microeconomic policies - e.g. Labour policy (wages linked to productivity)

Question 5

How is inflation measured

Answer 5

Consumer Price Index - Aus Bureau of Statistics collects prices for the average consumer and compares it with last year’s data

Question 6

How is inflation calculated (%)

Answer 6

(CPI(current year) - CPI(previous year)/CPI(previous year)) x 100