Inflation

Question 1

Inflation

Answer 1

An on-going rise in the general price level

Question 2

Deflation

Answer 2

A fall in the general price level

Question 3

Disinflation

Answer 3

A fall in the rate of inflation

Question 4

Rate of Inflation

Answer 4

Percentage change in CPI (Consumer Price Index)

Question 5

Nominal

Answer 5

E.g. Nominal wage or GDP. Actual or face value. Measured in current year dollar

Question 6

Real

Answer 6

E.g. Real wages or RGDP. Value adjusted for changes in the price level. Measured in constant-year dollars. In the case of real wages = purchasing power of wages.

Question 7

Investment

Answer 7

Increases in man-made resources

Question 8

Aggregate Demand

Answer 8

The total demand of all sectors that make up the economy

Question 9

Aggregate Supply

Answer 9

The total supply of all goods and services in the economy

Question 10

Cost-Push Inflation

Answer 10

Inflation caused by decreases in AS (Aggregate Supply)

Question 11

Demand-Pull Inflation

Answer 11

Inflation caused by increases in AD (Aggregate Demand)

Question 12

Quantity Theory of Money

Answer 12

MV = PQ

Question 13

Quantity Theory of Money
(M)

Answer 13

Money Supply

Question 14

Quantity Theory of Money
(V)

Answer 14

Velocity of Circulation (Refers to how many times money changes hands in a year - the number of transactions financed by a single dollar)

Question 15

Quantity Theory of Money
(P)

Answer 15

Price level

Question 16

Quantity Theory of Money
(Q)

Answer 16

Level of national output/ output of goods and services

Question 17

Operating Surplus

Answer 17

(The government) Operating surplus = tax revenue without government spending

Question 18

Productivity

Answer 18

Output / inputs per unit of time

Question 19

Disposable Income

Answer 19

The amount of money that a person or family has left after paying their taxes

Question 20

Discretionary Income

Answer 20

The money left over after a person pays their taxes and for essential goods and services like housing and food

Question 21

Explain why the consumer price index is a weighted index

Answer 21

Price increases of some goods and services are more important than others. For example, an increase in housing costs will have more impact on the average household than an increase in clothing costs.

Question 22

What does PAYE mean?

Answer 22

Pay As You Earn : Employees earning a wage or salary are taxed directly from their pay.

Question 23

Overall Operating Balance

Answer 23

Revenue less expenses, plus net gains and losses. It shows whether the government sector has generated enough revenues to cover its expenses in any given year.

Question 24

Creeping Inflation

Answer 24

A constant, slow annual increase in the rate of inflation

Question 25

Hyperinflation

Answer 25

Where the price level rises at a very rapid rate.

Question 26

What is the CPI designed to do?

Answer 26

It is designed to provide a broad measure of changes in prices, as they affect New Zealand consumers in general.

Question 27

Household Income

Answer 27

Y

Question 28

Spending on Goods and Services

Answer 28

C

Question 29

I

Answer 29

Investment

Question 30

Government Expenditures

Answer 30

G

Question 31

Export Receipts

Answer 31

X

Question 32

Import Payments

Answer 32

M

Question 33

Savings

Answer 33

S

Question 34

Aggregate Demand Equation

Answer 34

AD = C + I + G + (X - M)

Question 35

Explain the impact of a 7.3% inflation rate on the purchasing power of a worker who receives a 4.3% increase in their nominal wages.

Answer 35

The worker will have decreased purchasing power as their real wages have fallen by 3%. They can purchase 3% less goods and services than before.

Question 36

Explain one reason why high inflation rates may cause income distribution to become more unequal.

Answer 36

People who are on fixed wages /incomes may have no changes to their nominal wages, whereas those on higher incomes may have the ability to negotiate wage increases in line with or exceeding the inflation rate.

Question 37

Borrowers

Answer 37

Borrowers are better off in times of high inflation as the value of assets they buy increases. Future debt repayments will be paid with dollars of less value.

Question 38

Savers

Answer 38

Savers are worse of in times of high inflation as the value of their savings falls in real terms. Consumers will also shift towards consumption over savings as they expect prices to rise and the purchasing power of their savings to fall.