Macroeconomic Essentials (Economics 1B) Unit 6

Questions and Answers

What is a consequence of high inflation on decision makers?

They focus on investing in foreign currency

They increase their savings in fixed deposits

They become more concerned with seeking profitable new production opportunities

They become more concerned with anticipating inflation (correct)

What is a result of inflation on people's behavior?

They invest in productive activities such as new factories and machinery

They save more in traditional forms such as fixed deposits

They reduce their consumption of goods and services

They engage in speculative practices such as speculating in shares and foreign currency (correct)

How does inflation affect savings?

It reduces the value of existing savings (correct)

It has no effect on savings

It encourages saving in traditional forms

It increases the value of existing savings

What is a consequence of high inflation on South Africa's international competitiveness?

It decreases South Africa's international competitiveness Signup and view all the answers

Why do people become unhappy during periods of inflation?

Because price increases make them unhappy Signup and view all the answers

Why does the South African government aim to keep inflation between 3-6%?

Because it balances the need to control inflation with the need to promote economic growth Signup and view all the answers

What is inflation often described as?

Public enemy number one Signup and view all the answers

What does the Consumer Price Index (CPI) reflect?

The cost of a representative basket of goods and services Signup and view all the answers

How is inflation calculated?

By taking the percentage change in the CPI over a period of time Signup and view all the answers

What is the main limitation of the Monetarist Approach to explaining inflation?

It assumes that changes in the quantity of money do not affect real variables Signup and view all the answers

What causes Demand-Pull Inflation?

Increase in aggregate demand with constant aggregate supply Signup and view all the answers

What is the result of Demand-Pull Inflation?

Prices of goods and services increase Signup and view all the answers

What is the main characteristic of inflation?

Constant significant increases in the general price level Signup and view all the answers

Why are there multiple approaches to explaining inflation?

Because inflation is a complex and dynamic process Signup and view all the answers

What is the main reason for cost-push inflation?

Increase in the cost of production Signup and view all the answers

What is the major problem with demand-pull and cost-push inflation?

They become intertwined in the inflation process and are difficult to distinguish Signup and view all the answers

What is the term used to describe the situation where a country imports oil and experiences a rise in prices due to a war in the Middle East?

Imported inflation Signup and view all the answers

According to the Structuralist approach, what are the three interrelated sets of factors that result in inflation?

Underlying, initiating, and propagating factors Signup and view all the answers

What is the primary cause of inflation according to the Conflict Approach?

A fundamental disharmony in society Signup and view all the answers

What is one of the distribution effects of inflation?

Redistribution of income wealth from the elderly to the young Signup and view all the answers

Which of the following is NOT a set of effects of inflation?

Velocity of Money Effects Signup and view all the answers

What is the result of a country experiencing a rise in prices due to a war in the Middle East, if the money supply stays constant?

No change in the general price levels Signup and view all the answers

What is the primary goal of policymakers in relation to inflation?

To accord a high priority to inflation Signup and view all the answers

What is the relationship between the rate of growth in the real national income and the rate of growth of the total effective claims on this income, according to the Conflict Approach?

They are unequal Signup and view all the answers

Study Notes

Introduction to Inflation

Inflation is a state of economy where there are constant and significant increases in the general price level.
It is measured using the Consumer Price Index (CPI), which reflects the cost of a representative basket of goods and services.
Inflation is calculated by taking the percentage change in the CPI over a period of time (not less than a year).

Causes of Inflation

There are four approaches to explain the causes of inflation: Monetarist, Demand-Pull and Cost-Push, Structuralist, and Conflict approaches.
Monetarist Approach: Regards inflation as a purely monetary phenomenon, where sustained high rates of monetary growth cause high inflation.
Demand-Pull and Cost-Push Approach:
- Demand-Pull Inflation: Occurs when aggregate demand for goods and services increases while aggregate supply remains unchanged, leading to excess demand that pulls up prices.
- Cost-Push Inflation: Triggered by increases in the cost of production, which pushes up price levels.
Structuralist Approach: Inflation is the result of the interaction between three interrelated sets of factors: underlying, initiating, and propagating factors.
Conflict Approach: Inflation is a symptom of a fundamental disharmony in society, resulting from a continuous imbalance between the rate of growth in real national income and the rate of growth of total effective claims on this income.

Effects of Inflation

Distribution Effects:
- Inflation benefits debtors at the expense of creditors.
- Inflation tends to redistribute income and wealth from the elderly to the young.
- Redistribution from the private sector to the government.
Economic Effects:
- Anticipating inflation can lead to decision-makers becoming more concerned with anticipating inflation than seeking profitable new production opportunities.
- Speculative practices may occur, where people engage in speculative activities instead of productive investments.
- Inflation can discourage saving by reducing the value of existing savings.
- Balance of payment problems can arise, where inflation increases the costs of export industries and import-competing industries.
Social and Political Effects:
- Price increases can make people unhappy, leading to blame-shifting among different groups in society.

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Description

Understand the concept of inflation, its measurement using the Consumer Price Index (CPI), and its causes including monetarist and demand-pull approaches.