INFLATION

Question 1

What is Inflation?

Answer 1

The gradual increase of prices over time, it reduces the “purchasing power” of money.

Question 2

Nominal Wage

Answer 2

Wage measured by dollars rather than purchasing power

Question 3

Real Wage

Answer 3

Wage adjusted for inflation.

Formula = Nominal Wage/ Price Level

Question 4

Consumer Price Index (CPI)

Answer 4

Measures the prices of only the goods and services bought by consumers. CPI= Price of market basket/ Price of market basket in base year *100

Question 5

GDP Deflator

Answer 5

Measures the prices of all goods produced domestically. GDP Deflator= Nominal GDP/ Real GDP *100

Question 6

Causes of Inflation

Answer 6

1. Monetarist Inflation
2. Demand-Pull Inflation
3. Cost-Push Inflation

Question 7

Monetarist Inflation

Answer 7

• The excessive supply of money
• Prices increase because there is too much money in the economy
• Governments that keep printing money to pay debts end up with hyperinflation

Question 8

Monetarist Inflation - Quantity Theory of Money Identity

Answer 8

M x V = P x Y

M= money supply
V= velocity
P= price level
Y= quantity of output

The velocity of money is the average time a dollar is spent and re-spent in a year.

Question 9

Demand-Pull Inflation

Answer 9

Strong consumer demand for a product or service, when there is a wide surge of demand for a product or service in an economy, their prices tend to increase.

Question 10

Cost-Push Inflation

Answer 10

Occurs when prices rise because production costs such as raw materials and wages increase.