Macroeconomics - L11 Low Inflation

Question 1

What is demand inflation?

Answer 1

An increase in the general level of prices which occurs because of stronger demand in the economy for goods and services, which pushes prices up.

Question 2

List 5 possible causes of demand inflation.

Answer 2

1. Consumer confidence
2. Business confidence
3. Disposable income
4. Interest rates
5. Levels of overseas growth

Question 3

Consumer confidence can cause demand inflation because…

Answer 3

If consumers are feeling confident about the state of the economy, they are more likely to demand goods and services and increase spending on goods and services, which drives up prices.

Question 4

Interest rates can cause demand inflation because…

Answer 4

If interest rates are low, consumers and businesses are more likely to borrow money and spend it on goods and services because the cost of borrowing is low. This will increase AD and prices.

Question 5

Levels of overseas growth are likely to cause demand inflation because…

Answer 5

if countries we trade with experience higher levels of growth in their own domestic economies, they are more likely to demand Australian made goods and services, which pushes prices up.

Question 6

What is cost inflation?

Answer 6

An increase in the general level of prices which occurs due to factors that affect AS such as an increase in the cost of production or climatic conditions for example.

Question 7

Provide 3 causes / specific examples of cost inflation.

Answer 7

1. An increase in wages is likely to result in producers increasing their prices to protect their profit margins.
2. An increase in the costs of inputs into the production process such as timber or steel is likely to result in producers increasing their prices to protect their profit margins.
3. An increase in the price of petrol is likely to result in producers increasing their prices to protect their profit margins.
4. An increase in the rent of offices is likely to result in producers increasing their prices to protect their profit margins.
5. A reduction in productivity means that less output will be produced from any given level of inputs. Producers may increase prices to protect their profit margin.
6. Adverse climatic conditions such as a drought or flood will impact a producer’s ability to supply and cause an increase in prices to protect profit margin.

Question 8

What is hyperinflation?

Answer 8

The uncontrollable and rapid increase in inflation.