Question

home poup poda 7. Define the following terms: a) Inflation. b) Disinlation- c) Deflation- d) Consumer Price Index (CPI)- 8. List and explain the three types of inflation" Which is the WORST TYPE? WHY? 1. 2. 3. 9. Core Inflation excludes: 10, GIVEN: Nominal Income-S 400 Billion, CPI = 125 % Wo 11, GIVEN: Real Interest Rate-4 %, Inflation Premium-5 % Calculate the Nominal Interest Rate a bank should charge a borrower Show All Work! 12. Who is hurt by inflation? Identify three parties who are hurt by inflation. 1. 2. 3. 13. Explain the 2 impacts which a negative real interest rate creates relative to consumer spending. 1) 2)

Answer 1

PART-7)

a) Inflation refers to the rise in the general level of prices over time. The inflation rate measures the percentage growth rate of CPI from one year to the next. When Inflation occurs in an economy the purchasing power of money decreases

b) Disinflation refers to the inflation rate, a slowdown in the rate of increase of the general price level of products and services in a country's gross domestic product over time

c) Deflation refers to a fall in the general price level in a country. It can also be stated as a negative rate of inflation which refers that the value of money increases rather than decreases.The periods of deflation generally lead to lower consumer spending, thus low real GDP and lower economic growth; as a result it creates more deflationary pressure in the economy

d) The Consumer Price Index, refers to a measurement of inflation computed by government statisticians based on the price level from a fixed basket of goods and services that demonstrates the purchases of the average consumer.

PART-8)

The main types of inflation are:

Demand Pull Inflation: Demand-pull inflation occurs when prices increases because the aggregate demand in an economy is greater than the aggregate supply.

Cost-push inflation: Cost-push inflation occurs when prices pushed up due to increases in wages, raw materials, indirect taxes and other input factors (labor, capital, land or entrepreneurship).

Hyperinflation: Hyperinflation refers to extremely high and typically accelerating inflation. It is the worst because it usually has a devastating impact on output and employment because of the extraordinary rapid inflation. When price sharply rises and irregularly during hyperinflation then the normal economic relationships get interrupted. As a result consumers get confused and finds it difficult t figure out what to pay. Moreover, resource suppliers want to get payed with output not rapidly reduces money. This could lead to an economic, social and possibly political chaos due to hyperinflation