Price stability and inflation

Question 1

Define INFLATION

Answer 1

increase in the general price level of goods and services in an economy over a period of time

Question 2

Define the INFLATION RATE

Answer 2

measures the rate of change of the price level

Question 3

Name three commonly used measures of price level change.

Answer 3

Consumer Price Index (CPI), Producer Price Index (PPI), and GDP deflator.

Question 4

What is the Consumer Price Index (CPI) used for?

Answer 4

CPI measures the cost of a consumption basket of a representative consumer over time.
Inflation is calculated as the change in CPI over time.

Question 5

How is inflation calculated from the Consumer Price Index?

Answer 5

Inflation is calculated as the change in CPI over time.

Question 6

Explain the concept of deflation.

Answer 6

Deflation occurs when the price level decreases over time.

Question 7

Describe the calculation of CPI as a Laspeyres index.

Answer 7

CPI is calculated as a Laspeyres index based on a fixed consumption basket.

Question 8

What is the Producer Price Index (PPI) used for?

Answer 8

PPI measures the change in prices of industrial goods produced and sold domestically.

Question 9

How is GDP deflator calculated?

Answer 9

GDP deflator is calculated as the ratio of nominal GDP to real GDP.

Question 10

What are some limitations of price indices like CPI?

Answer 10

Price indices have limitations due to the choice of base year and the assumption of fixed consumption patterns.

Question 11

What are the types of inflation based on intensity?

Answer 11

Types of inflation based on intensity include moderate inflation, galloping inflation, and hyperinflation.

Question 12

Describe moderate inflation.

Answer 12

Moderate inflation is characterized by single-digit increases in prices, allowing for stable economic decisions.

Question 13

What characterizes galloping inflation?

Answer 13

Galloping inflation involves two-digit increases in prices, leading to economic instability and capital flight.

Question 14

Define hyperinflation.

Answer 14

Hyperinflation is characterized by annual inflation rates exceeding 1000%, resulting in significant wealth redistribution.

Question 15

What are the economic effects of inflation?

Answer 15

Inflation affects income and wealth distribution and economic efficiency and production.

Question 16

What is considered the optimal inflation rate?

Answer 16

The optimal inflation rate is typically around 2% to promote economic growth and stability.

Question 17

What are the causes of inflation according to modern theories?

Answer 17

Modern theories of inflation include demand-pull inflation and cost-push inflation.

Question 17

Differentiate between demand-pull inflation and cost-push inflation.

Answer 17

Demand-pull inflation occurs when aggregate demand exceeds production capacity, leading to price increases.
Cost-push inflation occurs due to increased production costs, such as higher wages or input prices.

Question 18

What is inflation inertia, and why does it occur?

Answer 18

Inflation inertia refers to the persistence of inflation due to economic decisions being based on inflation expectations.

Question 19

Define stagflation.

Answer 19

Stagflation is a combination of high inflation and high unemployment, resulting in economic stagnation.