Inflation

Question 1

What is inflation?

Answer 1

It is the high and persistent rise in the general price level.
The purchasing power is increasing at a fast rate than the value of goods and services available for purchase

Question 2

Rates of inflation

Answer 2

Creeping inflation -this is when the price level rises gently the increase in price is less than 3%(annually)
Walking inflation-this is the situation when the price level rises moderately the annual increase in price level is 3% to 9% (it is a single digit)
Running inflation-it is when the price rises rapidly (10% -20%) per annum it affects the medium and poor classes mostly
Hyper-inflation- this is where the price is actually rising very fast at double or triple digits(20-100%) it is also called galloping or runaway

Question 3

Measures of inflation

Answer 3

Wholesale price index-it is obtained at the point of production it measures the prices of goods like raw materials
Consumer price index-it measures the changes the price of goods and services directly consumed by individuals
Gross domestic product deflator-it is the price index of the GDP it is measured as the ratio of GDP of current prices to that of GDP of constant prices

Question 4

Types of inflation

Answer 4

• Demand-pull inflation- takes place when the aggregate demand is rising while the supply of available goods is dropping
• Cost-push inflation- this is caused by increase in cost of production which is passed on to consumers in the form of higher price
• Import-cost-push inflation-this relies on linkages between different countries arising from international trade

Question 5

Causes of inflation

Answer 5

• Increase in money supply
• increase in disposable income
• increase in public expenditure
• inadequate supply of goods
• high prices of imported goods
• high cost of domestic manufactured goods
• war

Question 6

Effects of inflation

Answer 6

-It affects government activities
-Fall in quality
-Reduction in saving
-Debtors gain, creditors lose
-wage earners lose because they have a fixed income and no extra cash to rely on
And so much more

Question 7

How to control inflation

Answer 7

• Monetary policy
• Fiscal policy
• Physical measures: wage and price control

Question 8

Price control

Answer 8

There’s price ceiling (set maximum price) to avoid exploitation,to protect a segment of population, to control inflation and price flooring(set minimum price) to save an industry from collapsing, to help fixed income earners

Question 9

Importance of inflation

Answer 9

• It will guarantee full employment
• It helps promote investment and capital accumulation
• Individuals with property enjoy economic growth

Question 10

Stagflation and deflation

Answer 10

Stagflation is when the inflation rate is high and the economic growth is low and unemployment is also high while deflation is the general reduction in the general price level in an economy