Inflation

Question 1

How does inflation relate to price stability?

Answer 1

We have price stability when the inflation rate is considered acceptable, and is from 2-3%.

Question 2

What happens during periods of inflation?

Answer 2

• Prices are increased
• More money is being spent
• The value of money decreases

Question 3

How are people’s standards of living affected during inflation?

Answer 3

For people to maintain a similar standard of living during inflation, wages and salaries must also increase at the same rate.

Question 4

What causes inflation?

Answer 4

• Scarcity (a shortage of supply)

- High consumer demand for particular products

Question 5

What is demand pull inflation?

Answer 5

Demand pull inflation is when there are not enough goods and services to meet the demand.

Question 6

What is cost push inflation?

Answer 6

Cost push inflation is when the cost of producing goods is increasing.

Question 7

What factors can influence economic activity?

Answer 7

• Business and consumer confidence (those that are confident will spend more, those that aren’t confident will spend less)

Question 8

What is deflation?

Answer 8

Deflation is a general decrease in the prices of most goods and services.

Question 9

What causes deflation?

Answer 9

Deflation can be caused by:

• A recession, where economic growth declines, fewer goods and services are produced, and consumer demand is lower.
• High interest rates

Question 10

Deflationary spiral

Answer 10

Falling demand    ⤵️
         ⬇️
Falling prices         ⬆️
         ⬇️
Debt default          ⬆️
         ⬇️
Bankruptcies         ⬆️
         ⬇️
Layoffs and wage ⤴️
    reductions

Question 11

What is hyperinflation?

Answer 11

Hyperinflation is an extreme situation where prices rise very quickly.

Question 12

Who benefits from inflation?

Answer 12

People that benefit from hyperinflation:

• Those with a high income
• Those who can afford expenses
• Producers who can make a profit

Question 13

Inflation

Answer 13

Inflation is when the prices of most goods and services increase over a period of time.

Question 13

Who is negatively impacted by inflation?

Answer 13

• unemployed people (living on a fixed income, must spend bulk of which on necessities)
• university students (also living on fixed income, and job opportunities depend on the health of the economy)

Question 15

Why are low levels of inflation good for the economy?

Answer 15

• Stimulates the economy

- Increases economic activity

Question 16

What are government policies that affect inflation?

Answer 16

Budgetary policy: when the govt. cuts taxes, consumers have more disposable income to spend

Monetary policy: reducing the interest rate encourages people to borrow and not save. This can cause prices to rise

Question 17

What could a government do during deflation?

Answer 17

During deflation, the govt. could cut taxes or reduce interest rates. This increases economic activity.

Question 18

What could the government do during periods of (either high or hyper) inflation.

Answer 18

The govt. could raise interest rates. This decreases the economic activity.

Question 19

How often does the ABS calculate the inflation rate, and how do they do so?

Answer 19

The inflation rate is calculated every quarter (every 3 months) by using the Consumer Price Index (CPI). The CPI measures the average change is the retail price of a basket of goods.

Question 21

What is weighting?

Answer 21

Items in the basket of goods are weighted in relation to their importance, and how much the typical family spends on them. These weightings are revised every 5 years

Question 22

What makes a country miserable?

Answer 22

• high inflation
• war (that can interrupt supply of goods or trading)
• high unemployment
• deflation

Question 23

+s and -s to Greece keeping the euro

Answer 23

\+ it's easier to trade
\+ consumer confidence remains
- rest of Eurozone will remain hostile to Greece
- debt will increase
- austerity measures will remain

Question 24

What are the 5 task word tips?

Answer 24

1. Analyse: provide good level of detail when describing issue, consider various perspectives
2. Outline: briefly use key terms to explain a concept
3. Describe: use key terms to describe a concept in moderate detail
4. Discuss: outline both positives and negatives
5. Evaluate: outline both strengths and weaknesses

Question 25

What is the basket of goods, and what might be in it?

Answer 25

The basket of goods is measured by the Consumer Price Index (CPI). Some categories in the basket are:
- food
- transport
- health
- education
These would be included because they are necessary to maintain living standards.

Question 26

How many product price increases are most likely to lead to inflation?

Answer 26

The general prices of a range of goods and services must increase to cause inflation. For example, price increases in items such as petrol and food.

Question 27

Who are the winners during times of deflation?

Answer 27

• wealthy people who own assets
• skilled workers who have a steady income
• business owners who provide the economy with highly demanded goods and services

Question 28

Who is negatively impacted by hyperinflation?

Answer 28

• unemployed people (they can’t afford to buy expensive goods)
• university students
• pensioners