Inflation

Question 1

how do you calculate inflation from cpi

Answer 1

(CPI June 2018/CPI June 2017 ) - 1 x 100

Question 2

what is inflation and what is the inflation rate this september quarter

Answer 2

a noticeable price increase overtime across a range of goods 0.7%

Question 3

what is the CPI

Answer 3

a measure of changes in the price of baskets (samples) of g/s bought by Aus households

Question 4

what is a basket

Answer 4

items classified into 11 major groups, 33 subgroups and 87 classes of expenditure

Question 5

what is a weight (what is health care weighted and what are weights influenced by)

Answer 5

percentenage of household income/ importance ABS attaches to items for HH (5/7% healthcare)
influenced by consumers preferences and reactions to price

Question 6

what is the formula for total expenditure per period

Answer 6

weight x price

Question 7

why is the CPI not a good measure of inflation (3 points)

Answer 7

only shows prices in cities which is not the true cost of living
doesnt reflect consumer preferences/substitutions
doesnt account for changes in equality of goods so price tends to be overstated

Question 8

what is a headline measure of inflation

Answer 8

the CPI is a headline measure of inflation, it is a broad measure of cost change in new purchases made by salary/wage earners

Question 9

what are the 2 factors effecting headline measures

Answer 9

1. price of agricultural commodities change each season (price falls when supply is up but rise in shortage or out of season)
2. Macroeconomic events - fall in interest rates mean household spending on mortgages have fallen

Question 10

what is an underlying measure of inflation and why is it better than headline

Answer 10

gives a more accurate picture of inlation and removes the above influences

Question 11

how do you calculate underlying measures:

1. trimmed mean
2. weighted mean

Answer 11

1. trimmed mean - all prices are arranged big to small and the top/bottom 15% are trimmed of
2. weighted median - median of inflatino rate in CPI basket

Question 12

what is demand pull inflation

Answer 12

too much money chasing too few goods - high demand caused by expenditure levels pulling up prices

Question 13

what are 3 things that idnicate high demand (demand pull)

Answer 13

1. high spending on construction/consumer durables
2. excess money supply (growth rate money > growth rate output)
3. excess labour demand (forces up wages = spending = = prices)

Question 14

what is cost push inflation

Answer 14

rising production cost passed onto consumers through high price

Question 15

what are 5 events that increase output price

Answer 15

1. wages rise faster than worker productivity
2. improts prices rises due to decreases currency
3. rising energy price
4. rising oil/petrol price
5. natural disasters

Question 16

describe output effects as a consequence of inflation

Answer 16

purchasing power is reduced and investment/output suffer

Question 17

what are the 5 output effects

Answer 17

1. real income falls (price + interest rates rise faster than income)
2. uncertainty
3. capital for labour substition (machines over ppl)
4. internation comp reduces
5. lack of confidence in money as a store of value

Question 18

output effects - further explain uncertainty as an output effect of inlfation

Answer 18

savings and investment are disccouraged which reduces growth
investment is more risky as future cost and price are uncertain so rate of return is uncertain
increase capital exp risk = lower output and lower employment

Question 19

output effects - further explain the reduction of international competitiveness as an output effect of inlfation

Answer 19

if australia’s currency inflates - demand for exports falls as price rises and improts become more competitive as price falls relative to AUS (inflation - currency depreciation)

Question 20

output effects - further explain a lack of confidence in money as a store of value as an output effect of inlfation

Answer 20

ppl seek to reduce risk against price rise this is done through purchasing assets which is speculative activity

Question 21

explain redistributive effects of inflation

Answer 21

inflation burden doesnt fall evenly on all sectors

Question 22

who are the 4 winner of inflation

Answer 22

1. households that can buy real assets
2. skilled workers
3. borrowers (build assets on borrowed funds)
4. government (revenue increases

Question 23

who are the 4 losers of inflation

Answer 23

1. low income earners (welfare)
2. lenders (interest rates fall)
3. savers (real value falls)
4. Pay as you go taxpayers

Question 24

what is bracket creep

Answer 24

increased tax liability due to inceased cinome or inflation pushing them to higher tax brackets