Inflation

Question 1

Define Inflation

Answer 1

Is a sustained increase in the general level of prices in an economy over a period of time

Question 2

How is inflation measured

Answer 2

By calculating the percentage change in the Consumer Price Index from one period to the next

Question 3

What is the headline rate of inflation

Answer 3

Includes everything in the CPI and is a good indicator of the ‘cost of living’

Question 4

What is the underlying rate of inflation

Answer 4

An underlying (or fundamental) rate of inflation measures the inflationary pressures in the economy that are predominantly due to market forces, i.e. changes in prices that reflect only the supply and demand conditions in the economy.

Question 5

What are the causes of inflation

Answer 5

Deman-Pull: When AD exceeds the productive capacity of the economy
Cost-Push: Increase in the costs of the factors of productions
Expectations
Imported Inflation
Govt. Policies

Question 6

What are the policies used to reduce inflation

Answer 6

Reduced the rate of Inflation: Contractionary MP & FP

Increase the rate of Inflation: Expansionary MP & FP