Government Objectives
Inflation/Deflation
Q: What is inflation?
A: Inflation is the sustained increase in the general price level of goods and services in an economy over a period of time.
Q: What is deflation?
A: Deflation is the sustained decrease in the general price level of goods and services in an economy over a period of time.
Q: What is disinflation?
A: Disinflation is a slowdown in the rate of inflation, meaning prices are still rising but at a slower rate.
Q: How is inflation measured?
A: Inflation is measured using the Consumer Price Index (CPI) or the Retail Price Index (RPI).
Q: What is hyperinflation?
A: Hyperinflation is extremely rapid and out-of-control inflation, often exceeding 50% per month.
Problems Measuring Inflation
Q: Why might inflation measurements be inaccurate?
A: Changes in consumption patterns, substitution bias, and regional price variations can cause inaccuracies.
Q: What is substitution bias in measuring inflation?
A: It occurs when consumers switch to cheaper alternatives, which isn’t immediately reflected in inflation data.
Q: How do new products affect inflation measurement?
A: New goods take time to be included in the basket of goods, potentially underestimating inflation initially.
Q: Why might inflation differ between households?
A: Different income groups and spending habits mean households experience inflation differently.
Q: What is the difference between CPI and RPI?
A: CPI excludes housing costs like mortgage interest payments, while RPI includes them.
Effects of Inflation
Q: How does inflation affect purchasing power?
A: Inflation erodes the purchasing power of money, reducing the real value of income and savings.
Q: What is the impact of inflation on savers and borrowers?
A: Savers lose value on their savings, while borrowers benefit as the real value of their debt decreases.
Q: How does inflation affect competitiveness?
A: High inflation can make exports more expensive, reducing international competitiveness.
Q: What is wage-price inflation?
A: A cycle where rising wages lead to higher costs for firms, which in turn raise prices.
Q: Why is deflation often seen as harmful?
A: Deflation can lead to lower consumer spending, reduced business revenues, and increased debt burdens.
Q: What is the impact of inflation expectations on the economy?
A: If people expect higher inflation, they may demand higher wages, leading to cost-push inflation.
Growth
Q: What is economic growth?
A: Economic growth is the increase in the productive capacity of an economy over a period of time, usually measured by GDP.
Q: What are the two types of economic growth?
A: Actual growth (increase in real GDP) and potential growth (increase in productive capacity).
Q: What are the key drivers of long-term economic growth?
A: Investment in capital, technological progress, labor productivity, and human capital development.
Q: What is the difference between nominal and real GDP?
A: Nominal GDP measures output at current prices, while real GDP adjusts for inflation.
Q: How does economic growth affect living standards?
A: Growth generally increases incomes, improving living standards, but benefits may not be evenly distributed.
Q: What are the environmental costs of economic growth?
A: Growth can lead to resource depletion, pollution, and loss of biodiversity if unsustainable.
Q: What is the relationship between economic growth and unemployment?
A: Economic growth tends to reduce unemployment by increasing demand for labor.