The Goal of Low Inflation

Question 1

Define Inflation

Answer 1

Inflation = the average rise in prices (cost of living) over a period of time.

Question 2

Define Disinflation

Answer 2

Disinflation = the average rise in prices (cost of living), but lower than usual.

Question 3

Define Deflation

Answer 3

Deflation = a fall in prices

Question 4

What is the RBA’s low inflation goal?

Answer 4

2-3% on average over the course of an economic cycle.

Question 5

Why does the RBA target 2-3% growth in consumer price inflation?

Answer 5

It provides the RBA with the flexibility to shift its focus away from inflation in an effort to achieve higher economic and employment growth. This flexibility is required for monetary policy to properly operate within its charter and act as a key stabilisation policy of government.

Question 6

What are the negative results of high inflation?

Answer 6

High inflation will tend to result in a less efficient allocation of a nation’s resources.

Results in the erosion of purchasing power and the decline in the real value of money - negative consequences for the economy and living standards.

Question 7

Explain the Government’s Goal of External Stability?

Answer 7

The federal Government’s External Stability Goal is to ensure that Australia is able to meet its international financial obligations.

Question 8

What are the 3 factors which make up external stability?

Answer 8

1 - The size of Australia’s CAD surplus in the BOP
2 - The level of Australia’s Net Foreign Debt (Gvt and Private)
3 - Stability of Australia’s Exchange rate (trade weighted index).

Stability = meeting obligations in a steady and predictable manner.

Question 9

Explain the exchange rate as a factor of external stability?

Answer 9

The Exchange rate is how much of another currency that AUD will buy.
Australia uses a floating currency - which means that the value of the AUD fluctuates based on demand and supply for the currency.