Effects of Inflation
Inflation is defined as a sustained increase in the general level of prices which results in a decline in the purchasing power of money. Inflation is measured through the Consumer Price Index (CPI) which measures proportional changes in prices in a representative “basket” of g’n’s, weighted according to their importance in a typical Australian households budget. The RBA aims to keep inflation at an annual rate of 2-3%, and in order to do this a number of policies are available for the Australian government. Keeping Inflation under control is a primary concern for the Australian Government as it affects so many different parts of the Economy, including Economic growth, standard of living and unemployment.
There are three types of inflation, depending on their causes. Firstly, demand pull inflation occurs when there is an excessive aggregate demand at or near full employment. If aggregate demand exceeds aggregate supply, prices of g’n’s rise as a rationing mechanism. This form of inflation is usually associated with periods of high economic activity. Secondly is cost-push inflation. If business costs such as the cost of wages or materials rise, businesses may aim to maintain profit levels by passing these costs onto consumers. This will result in higher prices and therefore inflation. The final type of inflation is imported inflation. Imported inflation occurs when the price of imports rises, and either adds to business costs (resulting in cost-push inflation) or feeds into the CPI as the price of final goods. Furthermore, a depreciation in the Au$ will raise import prices, also adding to imported inflation.
There are a number of factors which may cause inflation in the Australian economy. A major cause of demand-pull inflation is excessive growth in aggregate demand. If aggregate demand increases from AD to AD1, aggregate supply which is the equivalent of real GDP will rise to GDP2 and the price level will rise from P to P2. This results in the inflationary
There are three types of inflation, depending on their causes. Firstly, demand pull inflation occurs when there is an excessive aggregate demand at or near full employment. If aggregate demand exceeds aggregate supply, prices of g’n’s rise as a rationing mechanism. This form of inflation is usually associated with periods of high economic activity. Secondly is cost-push inflation. If business costs such as the cost of wages or materials rise, businesses may aim to maintain profit levels by passing these costs onto consumers. This will result in higher prices and therefore inflation. The final type of inflation is imported inflation. Imported inflation occurs when the price of imports rises, and either adds to business costs (resulting in cost-push inflation) or feeds into the CPI as the price of final goods. Furthermore, a depreciation in the Au$ will raise import prices, also adding to imported inflation.
There are a number of factors which may cause inflation in the Australian economy. A major cause of demand-pull inflation is excessive growth in aggregate demand. If aggregate demand increases from AD to AD1, aggregate supply which is the equivalent of real GDP will rise to GDP2 and the price level will rise from P to P2. This results in the inflationary