Question

In: Economics

Consumers and businesses in Darwin are assuming that the economy may face an inflation by the...

Consumers and businesses in Darwin are assuming that the economy may face an inflation by the end of 2020. What could be the consequence of such an assumption?

300 words

Solutions

Expert Solution

Before discussing the consequence of inflation which the consumers and businesses are assuming to be, we will discuss the meaning of inflation.

What is inflation?

It is the quantitative measure of the rate at which the average level of prices increase (price of basket of goods and services). Or it is the rise in the general price level.

How inflation affects the business?

If there are high prices for a certain period of time in a particular place than other countries, its exports become less price competitive in the world market. And as a result it leads to less demand for the country's exports, and there is a decrease in exports which results in less profit and decline in the number of jobs.

How inflation affects consumers?

The consumers will try to purchase more quickly before the prices rise too much. And when the prices are high they will compare prices at different shops. And as the inflation becomes higher, it will reduce the value of money.

Consumer price index (CPI) measures the weighted average level of prices of basket of goods and services which is purchased by the households.

Inflation is measured using the consumer price index.

Quarter result - In Darwin, Australia CPI increased by 0.3% in the march quarter 2020. The categories which contributed in this increase were tobacco, Alcohol, food and non alcoholic beverages.

Annual result- In darwin, through the year to march 2020 CPI increased by 1.5%. And same categories contributed in the increase of CPI.

The Consumer Price Index is an indicator of the inflation rate run by the Australian Bureau of Statistics.

What if the inflation will continue to increase in this way by the end of the year?

•It can cause high level of unemployment. The combination of rising inflation and unemployment is called stagflation.

•But on the other hand it can also cause increase in growth as the because of inflation the consumers will not spend too much and will invest more, this boost to spending and investment can lead to economic growth.

•Rising inflation generally translates into higher interest rates.


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