Inflation 5 (J) done

Question 1

inflation:

Answer 1

a persistent and appreciable rise in the general level of prices. reduces the rate of income demand

Question 2

inflation is measured:

Answer 2

by consumer price index. compares current prices with prices of earlier period (base period)

Question 3

inflation rate formula:

Answer 3

CPI year 2 - CPI year 1
________________________ x 100
CPI year 1

Question 4

largest group in basket

Answer 4

housing
then health, education, food

Question 5

headline rate of inflation:

Answer 5

CPI calculated, includes major price increases caused by one off price fluctuations

Question 6

underlying rate of inflation:

Answer 6

excludes ‘non-market’ and unusual forces on prices

Question 7

demand pull inflation:

Answer 7

occurs when the value of AE is greater than the value of total output (AD > AS) (high levels of AD come from any C + I + G (X-M))

Question 8

demand pull: too much money chasing…

Answer 8

too few goods

Question 9

demand pull: AD/AS model

Answer 9

an increase in demand shifts the AD curve to the right from AD1 to AD2, pushing up the price from P1 to P2

Question 10

demand pull inflation on bus. cycle

Answer 10

upswing or peak

Question 11

causes of demand pull inflation:

Answer 11

• high level of growth in foreign countries
• inflationary expectations (pre GST)
• monetary policy (too much credit in the economy)

Question 12

sources of demand pull inflation

Answer 12

any increase in C + I + G + (X-M) as economy approaches full employment

Question 13

cost push inflation:

Answer 13

occurs when increases in the cost of production are passed onto consumers in the form of higher prices

Question 14

sources of cost push inflation:

Answer 14

• world price of resources increase
• increase in taxes and charges
• growth in wages in excess productivity

Question 15

cost push inflation: AD/AS model

Answer 15

Increases in cost will move the supply curve to the left from AS1 to AS2, resulting in an increase in the price level from P1 to P2.

Question 16

inflation translates into a fall…

Answer 16

in the value of money and therefore the level of disposable income

Question 17

two effects of inflation

Answer 17

1. output effects on income, output and employment
2. redistribution effects of income and wealth in the economy

Question 18

4 output effects

Answer 18

1. confidence
2. international competitiveness
3. government policy
4. labour market

Question 19

output effects on what model?

Answer 19

AD on AD/AS model

Question 20

output effects: confidence

Answer 20

• inflation increases uncertainty about future outcomes.
• businesses will be less likely to invest (productive investments decrease, safe investments increase)
• consumer confidence reduced, increases savings, decreases spending so may reduce output and employment

Question 21

output effects: international competitiveness

Answer 21

• if our inflation rate is higher than trading partners/ competitors, imports become cheaper and exports become more expensive (reduces international competitiveness)
• reduce national output and employment, decrease terms of trade

Question 22

output effects: government policy

Answer 22

• tighter monetary policy (increase in interest rates), may reduce investment and consumption and negative impact on output and employment
• tighter fiscal policy - reduces gov expenditure in attempt to lower aggregate demand
• may reduce output and employment

Question 23

output effects: labour market

Answer 23

• capital for labour substitution (increasing wage rates causes uncertainty whereas cost of purchasing capital is certain
• occurs mainly in unskilled labour markets

Question 24

2 redistribution effects:

Answer 24

1. wealth and income
2. income

Question 25

redistribution effects: wealth and income

Answer 25

• borrowers gain at the expense of lenders (real value of loan falls in times of inflation, interest rates normally adjusted to account for inflation)
• people on fixed income fall behind as the purchasing power of their incomes is reduced in times of inflation, eg welfare benefit recipients

Question 26

redistribution effects: income

Answer 26

• governments may benefit because as incomes rise, people pay a higher rate of tax, process known as bracket creep