Study Notes
Inflation refers to the general increase in prices, affecting the purchasing power of money. It can be measured using the Consumer Price Index (CPI) and can have various causes and consequences.
- Inflation — a sustained increase in the general price level of goods and services in an economy over a period of time.
Example: A 6% inflation rate means prices are 6% higher than the previous year. - Deflation — a decrease in the general price level of goods and services, leading to increased purchasing power.
Example: A negative inflation rate, such as -3%. - Disinflation — a reduction in the rate of inflation, meaning prices are rising but at a slower pace.
Example: Inflation decreasing from 8% to 6%. - Cost-push inflation — occurs when prices rise due to increased costs of production.
Example: Higher wages leading to increased production costs. - Demand-pull inflation — occurs when prices rise because demand exceeds supply.
Example: A consumer boom increasing aggregate demand. - Price stability — a situation where prices in the economy do not change much over time.
Example: Inflation rates around 2%. - Consumer Price Index (CPI) — a measure that examines the weighted average of prices of a basket of consumer goods and services.
Example: CPI increase of 1.8% from August 2018 to August 2019 in Mauritius.
Exam Tips
Key Definitions to Remember
- Inflation
- Deflation
- Disinflation
- Consumer Price Index (CPI)
- Cost-push inflation
- Demand-pull inflation
Common Confusions
- Confusing disinflation with deflation
- Misunderstanding the difference between nominal and real values
Typical Exam Questions
- What is inflation?
Inflation is the general increase in prices over time. - How is the Consumer Price Index (CPI) calculated?
The CPI is calculated by measuring the average price change of a basket of goods and services. - What are the consequences of inflation?
Consequences include reduced purchasing power and potential economic instability.
What Examiners Usually Test
- Understanding of inflation, deflation, and disinflation
- Ability to calculate and interpret the inflation rate
- Analysis of the causes and consequences of inflation