UNIT 3 AOS 2 - part 2 - price stability

Question 1

define

Low and stable inflation

also known as price stability

Answer 1

The government (via the RBA’s) goal of low and stable inflation is to manage the increase in the general prices levels of goods and services, between 2-3% on average over time, measured by CPI.

Question 2

define

cost ….. inflation

(also whats …..)

AND WHATS A DIFFERECE b/w AD and AS

Answer 2

• general price levels caused by cost pressures
• independent of AD (expenditure)
• pass on increases in cop of consumers through higher prices (unless they cut profit or increase productivity)

cost PUSH inflation

Question 3

define

demand……. inflation

(also whaTs …….)

Answer 3

• rises in the general price level causes by excess spending or demand pressures
• creates shortages and puts upwards pressure on prices
• AD>AS

demand PULL inflation

Question 4

define

inflation

Answer 4

sustained increase in the general or average price levels (of g/s) over time

OR: A sustained increase in the general or average price level overtime

Question 5

define

DISinflation

Answer 5

• occurs when the rate of inflation remains positive but lower than previously.
• E.g. from 2.6% to 1.5%.

Question 6

define

DEflation

Answer 6

• a sustained decrease in the average price level over time (negative rate of inflation)

Question 7

define

Headline inflation

(and diff with underlying)

add example

Answer 7

• raw inflation rate created by measuring changes (all price movements) in CPI
• The underlying rate is used by the RBA to indicate whether it should increase or decrease the cash rate

EXAMPLE e.g., removes volatility of changes in petrol prices

DIFF:

Question 8

define

Underlying inflation

(and diff with headline)

Answer 8

• Headline CPI minus volatile items that fluctuate grossly over time (e.g. Fuel, fruit and veggies) to indicate the real change in prices for households.
• This is usually (in order to determine the weighted and trimmed mean) measured through the trimmed and weighted mean, which measures the weighted mean of the central 70% of quarterly price change distribution of all CPI components.

Question 9

How is inflation measured?

(not the formula)

Answer 9

measured using the CPI which is an index that tracks changes in over 100,000 g/s in a baseket (regimen) and weights them based on importance over a period of time (typically quarterly/monthly) where the data collected is only in metropolitan areas

only in suburban areas

DID I SAY “TRACK CHANGES”

Question 10

Inflation forumla

what is annual and annualised rate?

Answer 10

(y2 −y1)/y1×100

• annual rate = prices increased over 12 months
• Annualized rate = quarter of inflation (x4 to make annual rate)

Question 11

consequence of high inflation

Answer 11

CHECK ORDER OF 2: LOSS IN INT COMP IS BEFORE LOWER NX

1/ erodes (lower) purchasing power
* ↓real value of money
* erodes purchasing power
* likely reduction in real wages (for ‘low skilled’ workers or low income earners on fixed incomes)
* bracket creep - individuals move into higher tax rate
* = ↓ effects of reducing disposable income
* ↓Acess to g/s

2/ Loss in international competitiveness
↓ real value of money
=erosion of purchasing power
=Aust g/s appear more expensive relative to another countries g/s then previously (since the rate of inflation is rising and tends to be higher than the trading partner’s rate of inflation)
= trading partner incentives to trade with other trading partner
= loss of international competitiveness
= ↑M and ↓X
= ↓AD = ↓ production = ↓DDL = ↑UNN = ↓Access to g/d

3/ wage-price inflation spiral
↑inflation
=↓ real wages
= (↑ demand higher wages)
= ↑ COP
(link more - use AS analysis)
= ↑ cost inflation (since firms try to maintain profit margin and tend to pass on higher prices to consumers)

4/ Loss of efficiency
* ↑prices
* investor redirect funds into ‘safer’ invs that are less productive (e.g., term deposits)
* re-direct resources away from their most allocatively efficient
* ↓production levels (production capacity)
* ↓ TE & ↓AE

5/ Consumer expectations (of quality of g/s)
* ↓ expectations

6/ High raw materials
* ↑COP

if wages do not keep up

For erdoes purchasing power check if redfuction of real wages is after erdoe puchasing power

Question 12

consequence of low inflation

Answer 12

1/ business see ↓ profits
= ↓ incentive to produce
= ↑ unemployment
= ↓ production
= ↓ MLS

2/ Inflation expectations (cons has low inflationary pressures)
= expect prices to fall
= may delay c/I expenditure
= ↓ AD
= ↓ production
= ↓ EG
=↓ DDL
= ↑ UNN

(e.g., housing market -> people way wait for houses to decrease further before buying = delayed expenditure)

Question 13

Difference between disinflation and deflation and inflation

Answer 13

Disinflation vs deflation
* Periods of disinflation can be good for a country if they had high inflation before (if they need to lower their inflation to the goal of price stability)

• Whereas Deflation is always bad as it send singals of: economy not expanding - SSG

Inflation vs Deflation
* deflation is always outside the goal (since -ve) whereas inflation will sometimes be in the goal

Disinflation vs Inflation
* if Australia had high rate of inflation then disinflation is always good for interntional competivenss when Austrlaia’s inflatoin is greater than our trading partners
* disinflation is always good for int competitiveness whereas inflation is always bad

Disinflation has been occurring for 2023-2024 period (but haven’t gone into deflation)