Inflation

Question 0

CPI

Answer 0

• official measure of inflation in Australia
• a representation
• an imaginary basket of selected goods and services bought by a typical capital city household
• CPI is the measure of the changes in price in this basket
• 100,000 goods and is reassessed every 5 years for accuracy

Question 1

inflation definition

Answer 1

• a steady and upward movement in the level of prices
• decreasing purchasing power over a period of time
• usually 1 year

Question 2

Basket of CPI

Answer 2

• divided in 11 groups, which are then divided into sub groups, then expenditure classes
• each category is weighted in accordance to its importance

Question 3

demand pull inflation

Answer 3

• occurs when aggregate demand increases at a rate faster than the capacity of the economy to produce goods and services
• aggregate demand > aggregate supply

Question 4

sources of demand pull inflation

Answer 4

• any increase in AD as the economy approaches full employment
• full employment causes labour shortages, producers increase wages to attract workers, this increases income therefore increasing consumption AD to rise
• high levels of investment increase employment, income, consumption and ultimately AD.
• growth in foreign economies lead to jigher incomes for exporters

Question 5

inflationary expectations for demand pull

Answer 5

• if people believe prices are gojng to rise,

- it brings forward expenditure decisions leading to demand pull

Question 6

monetary considerations for demand pull

Answer 6

• source of d.p. inflation
• too much cred in the economy
• leads to a reduction in interest rates
• leading to increase in Ad therefore increase in prices

Question 7

cost push inflation

Answer 7

• occurs when the price of inputs or resources increase
• when the prices are pushed up by riding costs to producers who compete with each other for increasingly scarce resources which are then passed onto consumers

Question 8

sources of cost push inflation

Answer 8

• any input may become a major cost to businesses, - a wage increase eg.
• if resources increase, cost push inflation increases
• wage rises in excess of productivity, increases lead to inflationary pressure
• extent to which a producer can pass on price rises depend on the level of competition within the industry
• inflation imported from abroad
• government budgetary problems, increase in cost of public utilities

Question 9

consequences of inflation

Answer 9

• impacts upon the level of output, income and employment
• can affect the distribution of income and wealth in the economy
• can impact on economic efficiency
  
  • eg. inflation diverts resources away from productive activities to speculative activities
• inflation promotes uncertainty,
  
  • savings and investment are discouraged therefore reducing the potential economic activity
• investment decisions are more risky as uncertainty and cant determine profit
• capital for labour substitutes
• when wages increase faster than production, causes replacement of machinery and unemployment increase
• causes a lack of confidence
• international competitiveness, people will import from countries with lower inflation
• real income falls

Question 10

low inflation

Answer 10

• helps maintain interest rates which are important for decision making criteria for investment and consumer durables

Question 11

relationship between inflation and exchange rates

Answer 11

• double edged sword
• inflation = currency depreciation
  depreciation = price of inputs rise

Question 12

redistribution effects of inflation

Answer 12

• living standards of low income earners or those with fixed incomes will fall unless indexed
• creditors lose money and debtors gain, unless lenders charge interest at rates whichh can cover inflation
• borrowers benefit from inflation, as they can buy assets
• PAYG taxpayers suffer bracket creep, as inflation causes their income to rise therefore paying more tax
• ## if inflation is expected = less severe