Unit 1 Outcome 3

Question 1

What is inflation?

Answer 1

. This refers to a rise in the general prices paid for goods and services over a period of time (usually between one year and the next).
. The inflation goal for the Australian economy is a rate if 2-3% whilst the current inflation rate is 1.3% for the first quarter of 2015.

Question 2

What is hyperinflation?

Answer 2

. Hyperinflation is considered an extreme situation where there is a rapid increase in prices, perhaps by more than 50% per month.
. This seriously erodes the purchasing power of all groups in the economy and has serious implications for the currency.

Question 3

What is deflation?

Answer 3

. This is a term used to describe generally falling prices over a period of time.
. It can happen in recessions and depressions when the level of economic activity is very weak.

Question 4

How is inflation measured?

Answer 4

. In Australia the ABS calculates the inflation rate every quarter by means of the consumer price index (CPI).

Question 5

What is Consumer Price Index (CPI)?

Answer 5

. This measures the average change in the retail price of a basket of local and imported consumer goods and services that represent a high proportion of spending by metropolitan households.
. The CPI has several important measures including the regimen, the prices surveyed, the weighting of items and the base year used for comparisons.

Question 6

What are the features of the CPI as a measure of inflation?

Answer 6

. the regimen
. the prices surveyed
. the weighting of items in the regimen
. the base year used for comparisons

Question 7

What is the regimen?

Answer 7

. This refers to the selection of items making up the ‘basket’ of goods and services included in the CPI.

Question 8

What is the prices surveyed?

Answer 8

. The ABS surveys the prices for the items included in the regimen.
. It does this at a representative range of retail outlets located in Australia’s eight capital cities.

Question 9

What is weighting?

Answer 9

. Weighting of items in the CPI reflects the relative importance assigned to each particular good or service included in the ‘basket’ or regimen.
. It reflects the spending patterns of typical households.

Question 10

What is the base year?

Answer 10

. This is the year against which price or cost of the basket of consumer goods and services is compared.

Question 11

What are some international inflation rates?

Answer 11

. Croatia -0.3%
. Greece -0.8%
. China 2.3%
. France -0.1%
. Venezuela 68.5%
. Canada 1.9%

Question 12

What are the limitations of the CPI as a measure of inflation?

Answer 12

. The regimen or basket does not measure changes in the price of all types of goods and services in all parts of Australia, only a sample of items in the eight capital cities, thereby ignoring price changes in other cities, towns and rural areas.
. The problems caused by the need to alter the regimen as a result of some products in the basket becoming less relevant, new products becoming very popular and by quality improvements that make the goods more expensive, even when there has been no inflation.
. The weighting process for each item in the regimen may not necessarily fully reflect the actual tastes or spending patterns of all households. The weighting of items within the regimen only reflects averages.

Question 13

What are the reasons for the importance of maintaining a low inflation environment in Australia?

Answer 13

. the affect on the incomes and purchasing power of individuals and households
. the affect on businesses
. the affect on the government

Question 14

How does inflation affect the incomes and purchasing power of individuals?

Answer 14

. low and middle income earners wages often don’t rise with inflation, therefore they have less purchasing power and living standards drop
. fixed interest earners who have invested their savings for a fixed term at a relatively low interest rate
. welfare recipients cash benefits lag behind rising prices
. real estate/property prices increase which is even harder for families
. however spectators in shares can make money from selling assets when expensive

Question 15

How does inflation affect businesses?

Answer 15

. causes businesses to increase prices
. become less competitive
. local import competing firms can find it difficult to survive and earn good profits
. businesses that import goods and services from low inflation countries find their sales are strong
. monopoly firms can get away with large prices (due to weak or no competition)

Question 16

How does inflation affect the government?

Answer 16

. government budgets/finances can both win and lose from inflation
. tends to cause their tax revenues to grow faster
. due to inflation boosting company profits they get more tax
. causes some people to earn higher income (meaning they are in higher tax brackets)
. demand inflation also causes the government to introduce policies that are designed to put the brakes on economic activity.

Question 17

What are causes or factors affecting Australia’s inflation rate?

Answer 17

1. Excessively strong demand-side conditions can cause demand inflation
2. Less favourable supply-side developments can cause cost inflation

Question 18

How do demand factors affect inflation?

Answer 18

. Demand factors are the influences on the level of spending and economic activity.
. (consumer confidence, household income, tax, trading partners, Australian dollar)
. Therefore changes in these factors may cause demand, and hence inflation, to become stronger or weaker.
. If these factors are becoming too excessive there will be too much spending chasing too few goods and services.
. This causes shortages and as a result firms raise prices. (demand inflation)

Question 19

How do supply factors affect inflation?

Answer 19

. Supply factors are influences affecting a firm’s level of efficiency, production costs, profitability and availability of resources. (increased wages payed to workers, reduced labour productivity or efficiency, weak competition, higher interest rates, severe climatic conditions)
. These factors might have either favourable or unfavourable Impacts on levels of production and prices.
. Higher production costs results in firms to raise prices for their goods and services to protect their profit margins (cost inflation)

Question 20

What are Australian government policies used to help achieve the goal of low inflation?

Answer 20

1. Aggregate demand policies can be used to control demand inflation
2. Aggregate supply policies can be used to control cost inflation

Question 21

What aggregate demand policies are used to slow demand inflation?

Answer 21

. contractionary monetary policy involving higher interest rates (help slow AD during inflationary period)
. contractionary budgetary policy involving higher taxes and reduced government outlays (slowing C, I, G and hence AD)

Question 22

What is demand inflation?

Answer 22

. This occurs in booms when there is too much spending and too few goods and services.
. This leads to widespread shortages and hence generally rising prices.

Question 22

What aggregate supply policies are ised to slow cost infkation?

Answer 22

. reducing tariff protection to help cut production costs
. reform of the labour market to help cut wage costs
. competition policy to lower production costs

Question 23

Other reasons to avoid rapid inflation.

Answer 23

. it tends to slow economic growth
. it weakens our international trading position
. it leads to greater income inequality

Question 24

What is cost inflation?

Answer 24

. Occurs when it costs firms more to produce goods and services.
. higher production costs in wages or raw materials are often passed onto consumers as higher prices so that businesses can protect profit margins.

Question 25

What is an example of hyperinflation?

Answer 25

Post WW2 Germany
. reached a monthly inflation rate of 29,500%
. in December 1923 4.2 trillion marks would get you USD 1
. it destroyed the mark so much that Germans began using it as a substitute for firewood and coal (since the currency was cheaper to burn)
. government ended ip introducing a new currency

Question 26

What is aggregate demand?

Answer 26

This is the total value for goods and services in an economy at a given time. The growth in the components of Aggregate demand is affected by changes in demand conditions/factors.

Question 27

What is the aggregate demand equation?

Answer 27

C+I+G+X-M=AD

Question 28

What is the mining boom?

Answer 28

The mining boom os the increased want for mining and energy resources such as coal, iron ore, gold, bauxite, oil, gas, copper and uranium. This boom is aided by the unprecedented demand for minerals from an emerging China. It basically kept us out of recession during the GFC.

Question 29

When was the mining boom?

Answer 29

It started around 2005 and began to decline around 2012.

Question 30

What were the positives of the mining boom?

Answer 30

. more jobs
. directly and indirectly boosted national incomes
. increases in business travel
. increases in Australia’s GDP

Question 31

What were the negatives of the mining boom?

Answer 31

. high Australian dollar
. impacts tourism
. lower employment growth
. (whilst the mining industry is doing well, others are struggling)

Question 32

The mining boom is not what it is said to be.

Answer 32

. effects local businesses
. not a family environment (no hospital, few schools, no daycare)
. high rent
. FIFO’s and DIDO’s are the only ones who are okay

Question 33

What is happening as a result of the mining boom’s slump?

Answer 33

. American investors want to get out as soon as possible
. as China buys less iron ore the Australian $ falls
. selling houses has increased 45%
. mining industry employment decreased by 1.9% (3,650) between June 2012 and June 2013

Question 34

What are some key sectors affecting economic growth?

Answer 34

. mining sector

. retail sector

Question 35

What is the retail sector?

Answer 35

This consists of all spending in store and online. This includes spending on food, clothing, household items, sporting, leisure products or services. The retail sector provides many jobs, however growth of online shopping has created some winners and losers in the retail sector.

Question 36

Why is the retail sector important?

Answer 36

. it provides many jobs

. it provides us with foods to fulfil our needs and wants

Question 37

What changes have occurred in the retail sector over the past 10 years?

Answer 37

. presence of online stores (more convenient for consumers)
. brick and mortar stores have to change in order to compete
. they compete by increasing hours and also by improving service so costumers are more enticed to go to their stores

Question 38

What are the three countries with the highest inflation?

Answer 38

. Venezuela
. Iran
. Argentina

Question 39

What is a two speed economy?

Answer 39

When two sectors are experiencing different rates of growth. Meaning one sector is growing at a faster rate than another.