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15 Cards in this Set

  • Front
  • Back
Define 'inflation'.
Sustainable and appreciable rise in the general level of prices.
How is inflation measured?
Consumer Price Index (CPI).
Explain the function of 'weighting' items.
To represent the proportion of aggregate expenditure the items form.
List 4 steps to constructing an index series.
1. Choose the items you wish to calculate.

2. Choose the years you wish to calculate.

3. Calculate each item's weighting of aggregate expenditure.

4. Find the average per annum price of each item.
What is the calculation for index points?
IP = expenditure of year x / expenditure of base year x 100
What is the calculation for inflation?
Inf. = change of IP / original IP x 100
List 10 categories within the CPI.
1. Food.
2. Alcohol & Tobacco.
3. Clothing & Footwear.
4. Health.
5. Transportation.
6. Communication.
7. Recreation.
8. Education.
9. Housing.
10. Miscellaneous.
Define 'demand pull inflation', and list 3 indicators of excess demand.
High levels of demand caused by high levels of aggregate expenditure.

1. High consumption.
2. AE > Exp.
3. Spending on durables.
Define 'cost push inflation', and list 3 possible sources of rising costs.
Increased prices for final goods and services paid by consumers, due to rising production costs.

1. When government changes and taxes rise.
2. Wages increase more than productivity.
3. When oil prices rise.
Explain why it is difficult (in reality) to distinguish demand from cost inflation.
Both feed into the inflationary cycle.

wages rise > costs > increased prices > increased wage demands > increased costs, etc...
Explain how inflation is partly related to the business cycle in Australia.
Inflation is a characteristic of the 'boom' phase in the business cycle.
Explain how conditions in the international arena impact on Australia's inflation.
A depreciation in the exchange rate increases inflation, as imported goods become more expensive. Globalisation has contributed to lower inflation, by reducing the pressure on prices. Supply shocks on items such as oil also increase inflation in Australia.
Explain what is meant by the economic 'deregulation'. Describe the effects on inflation.
Deregulation is the reduction and simplification, introduced 'level playing fields', and the promotion of competition and choice within a market. If wages rise faster than productivity, it would have an inflationary effect.
Explain what is meant by 'supply shocks'. Give two examples of how it could impact Australian inflation.
Supply shocks are unforeseen events that have a major impact on the economy. They can cause the prices of goods to double, or triple, and affect the supply of the goods.
Explain how inflationary expectations can influence actual inflation in a country.
Consumers will consider the expectations of the economic market in making financial decisions. If inflation is believed to be close, most consumers will store their money in safe goods.