Level 2 Eco Inflation

Q.1

(a)

Inflation rate is dictated by the general change in prices of all goods and services. One type
of product price change does not reflect the current inflation rate. Due to it not representing
the whole. For example, the fruit and vegetable prices falling by 3.1% does not mean
inflation is falling by 3.1%, because it donsn’t reflect the price level of all the all goods and
seveise as a whole.

(b)
The incresase in inflation form 1.5% in march 2021 to to 6.9% in march 2022, would most
likely cause the reserved bank to increases the official cash rate (OCR). This cause the
Newzealand dollar to increase in value. This will cause this cause Newzealand export to get
more expensive, and less competitive in the global market. However, this would make
importing goods more effective. As the Newzealand dollar becomes more valuable, this
means that new zealand frims can import more with the same amount of money. All of this
will cause Firms to export less and import more. High and increasing inflation rate also
usually cause high and increasing interest rates. This means that households with large
amounts of dabt (Due to loans or mortgages exct), will have to play more interest in order to
pay of loans. Versly, household with large amounts of savings will frind that there savings
would increase, due to high interest rates.

Q.2

(a)

(i)
On paper

(ii)

When inflation is high, business confidence will decrease as well as investment will
decrease.Production cost would usually increase during this.In order to keep profits stable,
business would usually increase prices or try the decrease production cost (Eg… laying off
staff) in order to combat the increasing inflationary pressure.

(b)

(i)
On paper

(ii)

A global recession would cause the cause the worlds county to exsperienice the recessions
due to it effect the foreign trade and frims. Global inflationary pressure will cause frims global
to incerces the price of there exports, thus making importing goods to become more
expensive. This, aswell as lack in investment cofildents globally causing investment to
 Level 2 Eco Inflation

decrease. Will cause AD to decrease according to our AD equation (Consumption +

investment + goverment spending (Export profits - imports cost)). Because AD has now
decreased, AS would soon follow to decreased profits cause frims to make less.

(c)

A combine consequences of a both a domestic and an international recession on new

zealand would be that high inflation rates and the recession would last longer. The combine
lack of foreign investment and capital due to lack of confidence and the decrease investment
from other country. Combined with the lack of money in the circulation, mean less money to
jump start any economy. This aswell as the fall in AD and AS globally. Will cause the
negative economic growth.

Q.3

(a)

(i)
On paper

(ii)

The increase in minimum wage will cause the supply of labour to increase. Due people being
more willing to work at the higher wage rates. This will how ever cause production cost to
increase due to increase in labour cost. Causing price to increase, as sean on the graph
above

(b)

(i)
On paper

(ii)

The increase in petrol price due to the increase in demand for petrol, and their not have
engouth petrol to met demand. would cause AD curve to increase by the AS stay stagenet.
This will cause price levels to increase due to the incerase in deemed of the petrol. And due
to nature of petrol being that people tend to keep buying by, although its expensive.

(c)
Minimum wage should have a smaller impact on inflation than the increase in petrol prices.
Because the increase in minimum wage doesn’t have as bis of an effect on business. Only a
small amount of business will have to raise price due the the increase of minimum wage,
because more business that pay employees minimum wage are large franchises that can
afford the hit. By the incerese in petrol prices would mean that the cost of transporting good
will incrasese. That effects both small business and big business. Thus thay more like to
increase the price to make up from increase in production cost.
Level 2 Eco Inflation