Topic 3: Inflation

Question 1

What is Inflation?

Answer 1

-is the term used to describe a situation where the general or aggregate level of prices is rising
-inflation can be defined as a fall in the value of money because it erodes the purchasing power of money.

Question 2

What is The Inflation Rate and how to calculate it?

Answer 2

• is the percent rate at which the price level changes from one period to the next
• Price level(this year) - Price level(last year) divided Price level(last year) x100

Question 3

Name 4 degrees of inflation

Answer 3

1. Creeping Inflation (1-4%): Not worrying
2. Running inflation (10-20%): inflation is imposing significant costs on the economy and could easily start to creep higher.
3. Hyper-Inflation (50%): Money ceases to function as a store of value, and it may not serve its other functions e.g. Romania, Zimbabwe
4. Stagflation: situation in which a nation’s economy is characterized by relatively high price inflation and low (or negative) rates of economic growth.

Question 4

What are the Causes of Inflation?

Answer 4

1. Demand-Pull Inflation: total demand for goods and services is greater than the total supply of goods and services available for sale. Arises from any factor that increases aggregate (total) demand (AD) including: increases in exports, consumption, investment
2. Cost-Push Inflation: Inflation that results from an initial increase in costs. Main sources are wage increases and increase in raw materials prices

Question 5

What are the Problems Caused by Inflation?

Answer 5

1) Savings are discouraged
2) Exports become more expensive
3) Imports- If domestic inflation is rising faster than inflation in other countries, then imports become cheaper, home grown goods in trouble
4) Excessive Wage demands
5) Menu Costs
6) Shoe Leather Costs
7) Inconvenience

Question 6

What are the Benefits of inflation?

Answer 6

• businesses encourage by rising prices
• moderate inflation increases risk taking
• Central bank targets a low but positive rate of inflation, thus avoiding the damage of hyperinflation on an economy and the threats of falling prices.
• Also enables them to use interest rate cuts to ward off a recession

Question 7

What is Deflation?

Answer 7

• is a fall in the general level of prices (negative inflation).
• Contractionary fiscal policy can sometimes be labelled as ‘deflationary’

Question 8

What is Disinflation?

Answer 8

Disinflation: a slowing of the inflation rate over a period of time.