Term 3: Inflation (Slides 5)

Question 1

What is inflation?

Answer 1

An increase in the general level of prices across the economy.

Question 2

How is inflation measured?

Answer 2

Consumer Price Index (CPI) or Regimen.

Question 3

What is the Consumer Price Index?

Answer 3

• the change in Purchasing Power and real income
• measures the rate of change in the regimen
• calculated QUARTERLY by ABS

Question 4

What is the Regimen?

Answer 4

• A basket of goods + services whose prices are surveyed to calculate inflation
• more than 80,000 items, grouped into 11 categories
• i.e. food, clothing, housing, transport, household goods, recreation, health.
• items are weighted according to importance + frequency of purchase
• prices used are form surveys at representative retail outlets in major cities.

Question 5

What is the formula for inflation?

Answer 5

((Price of year 2 - Price of year 1) / Price of year 1) x 100

Question 6

What are the 2 types of inflation?

Answer 6

• Demand side inflation: factors that lead to an increase in demand EXCEEDING THE CURRENT LEVEL.
• Supply side inflation: factors that lead to an increase in the cost of PRODUCING GOODS AND SERVICES.

Question 7

What causes inflation from the demand side?

Answer 7

An increase in:
- consumer optimism
- business confidence
- household or business income
- exports

Question 8

What causes inflation from the supply side?

Answer 8

An increase in:
- wages paid
- interest rates
- gov. taxes, oil prices, or utility prices
cost of raw materials
- cost of imports
- weaker exchange rate
- import tariffs

Question 9

What are the impacts of inflation?

Answer 9

• affects purchasing power and income distribution
• causes local producers to lose out to overseas competitors
• undermines economic growth
• changes the allocation or resources from productive to non-productive

Question 10

How is inflation used in Monetary Policy?

Answer 10

• is an indicator of the effectiveness of Monetary Policy
• stability of inflation supports business + consumer confidence, and certainty about employment decisions
• high inflation can lead to excessive fluctuations of the Economic Business Cycle
• is reviewed by RBA in the monthly Cash rate review

Question 11

What is Australia’s target percentage of inflation?

Answer 11

2-3%