Government Objectives

What is inflation?

Inflation is the sustained increase in the general price level of goods and services in an economy over a period of time.

What is deflation?

Deflation is the sustained decrease in the general price level of goods and services in an economy over a period of time.

What is disinflation?

Disinflation is a slowdown in the rate of inflation, meaning prices are still rising but at a slower rate.

How is inflation measured?

Inflation is measured using the Consumer Price Index (CPI) or the Retail Price Index (RPI).

What is hyperinflation?

Hyperinflation is extremely rapid and out-of-control inflation, often exceeding 50% per month.

Why might inflation measurements be inaccurate?

Changes in consumption patterns, substitution bias, and regional price variations can cause inaccuracies.

What is substitution bias in measuring inflation?

It occurs when consumers switch to cheaper alternatives, which isn’t immediately reflected in inflation data.

How do new products affect inflation measurement?

New goods take time to be included in the basket of goods, potentially underestimating inflation initially.

Why might inflation differ between households?

Different income groups and spending habits mean households experience inflation differently.

What is the difference between CPI and RPI?

CPI excludes housing costs like mortgage interest payments, while RPI includes them.

How does inflation affect purchasing power?

Inflation erodes the purchasing power of money, reducing the real value of income and savings.

What is the impact of inflation on savers and borrowers?

Savers lose value on their savings, while borrowers benefit as the real value of their debt decreases.

How does inflation affect competitiveness?

High inflation can make exports more expensive, reducing international competitiveness.

What is wage-price inflation?

A cycle where rising wages lead to higher costs for firms, which in turn raise prices.

Why is deflation often seen as harmful?

Deflation can lead to lower consumer spending, reduced business revenues, and increased debt burdens.

What is the impact of inflation expectations on the economy?

If people expect higher inflation, they may demand higher wages, leading to cost-push inflation.

What is economic growth?

Economic growth is the increase in the productive capacity of an economy over a period of time, usually measured by GDP.

What are the two types of economic growth?

Actual growth (increase in real GDP) and potential growth (increase in productive capacity).

What are the key drivers of long-term economic growth?

Investment in capital, technological progress, labor productivity, and human capital development.

What is the difference between nominal and real GDP?

Nominal GDP measures output at current prices, while real GDP adjusts for inflation.

How does economic growth affect living standards?

Growth generally increases incomes, improving living standards, but benefits may not be evenly distributed.

What are the environmental costs of economic growth?

Growth can lead to resource depletion, pollution, and loss of biodiversity if unsustainable.

What is the relationship between economic growth and unemployment?

Economic growth tends to reduce unemployment by increasing demand for labor.