Price Stability

Question 1

Inflation

Answer 1

Sustained increase in economy’s price level over a period of time

Question 2

2 causes of inflation

Answer 2

1. Demand-pull
2. Cost-push

Question 3

cost-push inflation

Answer 3

rise of price due increase cost of FOP -transportation, war, diseases

increase experience worker salary, increase AD, price level increases, worker demand more salary.

Question 4

demand-pull inflation

Answer 4

consumer bid for higher price on limited resources

Question 5

2 types of inflation

Answer 5

1. creeping inflation
2. hyper inflation

Question 6

+ve aspects of inflation

Answer 6

if the price increases but the cost stagnant
1. firm rich, open more branches and higher more employer
2. consumer get jobs and unemployment decreases
3. tax increase and government have more money

Question 6

deflation

Answer 6

sustained fall in price level

Question 7

disinflation

Answer 7

a fall in inflation rate

Question 8

why deflation can be bad?

Answer 8

Can lead to speculation of consumer to think that the price will continue to fall down and restrain themselves from buying

Question 9

calculate inflation rate

Answer 9

Change in index price/previous year index x 100

Question 10

if the value of the inflation rate is negative..

Answer 10

it’s deflation

Question 10

Why we need to be careful when selecting base year to calculate CPI?

Answer 10

eg. 2020 - COVID-19 occurs when inflation is very high, it will give the impression that deflation occurs the following year

Question 11

Why carrying survey is difficult for calculating CPI?

Answer 11

different region has different spending pattern and different standard of living. It is hard to find the overall price level.

the weightage for different item is different. Weightage for vegetables in a region where most of the population are vegetarian.

Question 12

What is real data?

Answer 12

the data is adjusted with inflation

Question 13

What does the monetarist say about the money supply?

Answer 13

Support the supplier - The key to high AD is the oversupply of money

Question 14

What do Keynesians say about the money supply

Answer 14

Support the consumer -They believed the cause of inflation was the rise in costs, which caused firms to borrow more money from banks, thus increasing the quantity of money.

Question 15

Possible cost of exports

Answer 15

Reduction of net export - the country that experiences inflation will be harder to export because

The consumer will also consume more import products

Question 16

Menu cost

Answer 16

Need to change price tag, change billboard, ect making the firm unpopular due to constant change in price

Question 17

What happens to lenders and borrowers during inflation?

Answer 17

Lender wins (gains more money), borrower loses (lose more money)

Question 18

Shoe leather cost

Answer 18

Cost of money involved in moving from one financial institution to another in search for higher interest rate

Question 19

Why don’t investors want to invest in an economy of unanticipated inflation?

Answer 19

When the interest rates are uncertain, the investor isn’t sure whether profit can be made or not

Question 20

Inflationary noise

Answer 20

Consumers and firms become confused regarding the price changes of other items. The rise of prices of some items leads to people believe that inflation is increasing

Question 21

GDP can either increase by increase in AD or AS, which one investor prefer?

Answer 21

Investor prefers to invest in country with high AD, price is increasing, so they can generate more profit

Question 22

What is recession?

Answer 22

2 consecutive fall in GDP

Question 23

Why does a recession occur?

Question 24

What is the role of trade union?

Answer 24

fight for better wages

Question 25

Can an increase in trade union power cause inflation?

Answer 25

Yes, salary increase and cost of production increases, AD shift right, AS shift left