Question #2309

Which of these situations represents an inflationary episode in the macroeconomic sense?

  1. (a) On July 1, 2000, the Australian government introduced a Goods and Services Tax of 10 per cent on most goods and services (with some exemptions). In the September-quarter 2000, the Consumer Price Index rose by 6.1 per cent.
  2. (b) The press reported that Australias property prices rose at their fastest rate since 2003 in February 2021.
  3. (c) The Consumer Price Index rose by 9 per cent in month one, six per cent in month two and 3 per cent in month three.
  4. (d) The Consumer Price Index rose by 3 per cent in month one, 6 per cent in month two and 9 per cent in month three.

Answer #11559

Answer: (c) and (d)

Explanation

Answer: Options (c) and (d).

In the video and written material, students were told that inflation is the continuous rise in the general price level.

Deflation is the opposite.

A once-off price rise is not an inflationary episode.

If the inflation rate is falling, prices are still rising but at a slower rate.

Extreme cases of accelerating inflation are referred to as hyperinflation.

They were also taught in the first week that the 'general price level' is a composite (unobserved) measure compiled by the national statisticians to reflect some basket of prices of actual prices of goods and services.

That measure is called the Consumer Price Index. There are other composite measures like the Producer Price Index produced by the statisticians, each aimed to convey some information about the underlying inflationary environment.

Option (a) was an example of a once-off price level change as business firms adjusted their prices up to accommodate the 10 per cent GST. It is not what we would call an inflationary episode, although it could have led to one.

Option (b) relates to price rises in a particular sector of the economy (property) and is also not a continuous rise in the 'general' price level, even though it may have influenced the course of prices generally.

Option (c) is an example of inflation where the price level is continuously rising but the rate of increase is deceleratng (slowing down).

Option (d) is an example of the price level continuously rising with the rate of increase is acceleratng (inflation rate is rising).