Inflation

Question 1

Inflation definition

Answer 1

Inflation refers to a sustained increase in the overall price level, over a period of time.
Due to inflation, price stability is a macroeconomic objective.
- It is the objective of the RBA to contain CPI between 2 -3% through Monetary Policy.

Question 2

Deflation

Answer 2

Deflation is when consumer and asset prices decrease over time, and purchasing power increases

Question 3

Stagflation

Answer 3

This refers to a period of high inflation AND high unemployment.

Question 4

CPI

Answer 4

The CPI is made up of 11 categories of expenditure. The CPI is a weighted average of price movements in eleven categories in Australia’s eight capital cities. such as housing (23%), food and non-alcoholic beverages (16%) etc

Question 5

Headline Inflation

Answer 5

Headline Inflation is measured through the CPI (Consumer Price Index), it measures changes in the prices of selected consumer goods and services.

Question 6

Underlying Inflation

Answer 6

Also known as ‘core’ inflation, is a measure that removes ‘one off’ seasonal or volatile factors (e.g. higher food prices due to a drought, large changes in oil prices etc.) Underlying inflation is a more accurate measure of inflation because volatile factors can distort the overall inflation rate.

Question 7

Inflation rate calculation

Answer 7

Current CPI - Previous CPI/ Previous CPI X 100

Question 8

What is demand-pull inflation?

Answer 8

Inflation caused by continuing rise in AD

Question 9

What is cost-push inflation?

Answer 9

Continuing rises in costs independent of any rises in aggregate demand

Question 10

Phillips Curve

Answer 10

It shows the relationship between the rate of inflation and the rate of unemployment in both the short-run and the long-run