Low and stable rate of inflation

Question 1

Define inflation

Answer 1

• economy faces persistent increase in GPL of goods and services
• inflation rate means that there is an increasing rate of change of GPL
• results in higher cost of living in country

Question 2

Degrees of inflation

Answer 2

• Mild
• Galloping
• Hyperinflation

Question 3

Mild inflation

Answer 3

• inflation rate single digit

- no drastic changes in prices

Question 4

Galloping inflation

Answer 4

• price lvl increase at high rates annually e.g. 50%, 100%, 200%

Question 5

Hyperinflation

Answer 5

• extremely high inflation rates (more than 3 digits)
• sustained
• lose confidence in money as a currency
• may resort to barter trade
• e.g Venezuela hyperinflation inflation rate= 9 585.5% in 2019

Question 6

Demand-pull inflation

Answer 6

• inflation caused by rising AD
• economy near/at full employment of resources
• ie. persistent increase in AD, little increase in AS, prices increase

Question 7

Reasons for change in AD

Answer 7

• real factors (C, I, G, (X-M)

- monetary factors

Question 8

Consumption expenditure (C)

Answer 8

• consumer optimism
• income
• personal income tax

Question 9

Investment (I)

Answer 9

• investors’ confidence
• technological innovations
• corporate income tax

Question 10

Gov expenditure

Answer 10

• expenditure on public and merit goods

Question 11

Net exports (X-M)

Answer 11

• incomes of other countries/ trading partners

- currency depreciation

Question 12

Change in real factors (Keynesian curve)

Answer 12

• extent of increase in GPL dependent on lvl of employment
• country nearer to fully employment
• harder for firms to increase output of gds and services due to shortage of resources
• excess demand bids up prices or real output
• rise in GPL at Yf (full employment)
• demand pull inflation occurs, when booming economy reaches peak of business cycle

Question 13

Full employment (Yf)

Answer 13

• no idle resources that can be utilised
• increase in AD, increase in GPL
• no corresponding increase in real national output

Question 14

Changes in monetary factor

Answer 14

• money supply

Question 15

Money supply

Answer 15

• increase money supply can cause inflation
• excessive supply of money
• due to too much issuing/printing money, large extension of bank credits
• too much money in economy chasing too few goods
• shortage of output cause bid up of prices to attain good