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13 Cards in this Set
- Front
- Back
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Inflation (definition) |
A sustained rise in the general price level |
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Define price stability |
The maintenance of a sustained rate of inflation |
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Define hyper inflation |
>50% per month |
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RBAs inflation target |
2-3% on average over the business cycle |
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Measuring inflation |
Percentage change in CPI |
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Headline inflation rate vs underlying inflation rate |
Headline - no altering Underlying - excludes entries subject to seasonal, erratic, or policy changes |
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Limitation of CPI |
- only metro areas recorded - slow to reflect changing consumer preferences - does not reflect substitutions made in response - does not consider quality changes |
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Demand pull inflation definition |
Aggregate demand is increasing faster than firms can expand their output, causing prices to rise. (an increase in aggregate demand) |
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Cost push inflation definition |
Rising costs of production are passed onto consumers in the form of higher prices. (an decrease in aggregate supply) |
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Wage price spiral |
Worker granted wage rises in excess of productivity gains, which causes and increase in house hold incomes. This causes aggregate demand to increase. If the economy is nearing full capacity, it may lead to price rises through demand pull inflation. This will lead to households purchasing power to decrease. This may be grounds for further wage increases. |
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Output effects of inflation |
Undermines business confidence (more difficult to predict future prices) High inflation decreases economy's competitiveness Distorts pattern o |
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Anticipated Inflation |
Banks increase interest rates, wages increase, resources are converted into assets >> more inflation caused |
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Unanticipated Inflation |
Output and redistribution effects |
