Date : ________________ Grade 11

Name : ________________ Economics

NOTE CHAPTER 20: PRICE STABILITY

1. Price stability occurs when prices rise by only a small percentage and there is an avoidance
of fluctuations in the price level.
2. Inflation actually means on average, prices are rising at a particular rate. When the price
level (also known as general price level) increase, the value of money falls and its
purchasing power declines.
3. A low and steady rise in price may even encourage firms to produce more known as
creeping inflation.
4. Hyperinflation occurs when inflation gets out of control and sometimes results in people
resorting to barter, exchanging goods and services for other goods and services rather
than using money to buy and sell products.
5. Deflation generally refers to a sustained fall in the price level. It occurs when the
inflation rate falls but is still positive. For instance, the inflation rate may decline from
8% to 6%. In case the price rising is still rising but at a slower rate.
6. The two comparisons most used by economists are the annual average method and the
year-on-year method.
7. Annual average method is a way of calculating the inflation rate by comparing the average
level of prices during a twelve-month period with the average level in the previous twelve
months.
8. Year-on-year method is calculated as the percentage change in the price level for a given
month with that of the month of the previous year.
9. A rise in the price level means that the cost of living has increased. To asses changes in
the cost of living government construct consumer price index (CPI). Consumer price index
(CPI) is a measure that shows the average change in the prices of a representative basket
of products purchased by households.
10. If a year is selected in which it is later found that inflation was unusually high, it may give
the impression that subsequent percentage changes in the price level were unusually low.
11. Number of problems involved carrying out a survey of people’s spending patterns. For
instance, elderly people may spend more than most on heating fuels and so would be
affected more than the young by a rise in their price.
12. Most governments update the content of the basket regularly in an attempt to ensure
that the weights remain representative of current household expenditure patterns. If
green tea rises in the price more than black tea, consumers may switch from buying green
tea towards buying black tea.
13. It is also possible that while price may not change, the quality and size of product may
decline.
14. Money values or nominal values are the values of the price operating at the line. In
contrast, real data is data in real terms has been adjusted for inflation.
15. There are two main causes of inflation; cost-push inflation and demand-pull inflation.

WELLINGTON INTELLIGENCE SCHOOL 2022/2023

Date : ________________ Grade 11
Name : ________________ Economics

16. Cost-push inflation occurs when prices are pushed up by increases in the cost of
production, while demand-pull inflation occurs when prices are ‘pulled-up’ by increases
aggregate demand that are not matched by equivalent increases in aggregate supply.
17. The possible costs of inflation are; a reduction in net exports, an unplanned redistribution
of income, menu costs, shoe leather costs, fiscal drag, discouragement of investment,
inflationary noise and inflation causing inflation.
18. The potential benefits of inflation are; stimulates output, reduces the burden of debt and
prevents some unemployment.
19. The effects of inflation depend on; the cause of inflation, the rate of inflation, whether
the rate of inflation is accelerating or stable, whether the inflation rate is the one has
been expected and how the inflation rate compares with the rate of other countries.
20. There are thought to be a number of reason for recent reductions in global in global
inflation such as; advances in technology, increased international competition and changes
in the labour market in a number of countries.
21. Deflation will increase the burden of debt, may increase the real rate of interest and may
result in menu costs.
22. Good deflation occurs as a result of an increase in aggregate supply. In contrast, bad
deflation takes place when the price level is driven down by a fall in aggregate demand.

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