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Question
1
Define
Inflation,
deflation
and
disinflation.
Check
answer.
Inflation
is
an
increase
in
the
average
price
level.
Deflation
is
a
decrease
in
the
average
price
level
-
it
is
negative
inflation.
Disinflation
is
a
decrease
in
the
rate
of
inflation.
There
is
still
inflation
but
at
a
lower
rate
than
before.
Next
Question.
Click
to
enlarge
image.
Click
and
hold
to
reduce.
Question
2
Using
the
diagram
below,
fully
explain
the
impact
of
An
increase
in
consumer
confidence
on
inflation.
Check
answer.
An
increase
in
consumer
confidence
will
mean
that
consumers
are
more
confident
about
the
future.
This
will
cause
an
increase
in
consumer
borrowing
of
money
and
spending.
Consumer
spending
or
consumption
is
a
component
of
Aggregate
demand,
so
if
consumption
increases
AD
will
increase
from
AD
to
AD2
causing
the
price
level
to
increase
from
PLe
to
PLe2
and
output
/
employment
to
increase
from
Ye
to
Ye2
-
this
is
demand
pull
inflation
as
the
average
price
level
increases.
Next
Question.
Previous
Question.
Click
to
enlarge
image.
Click
and
hold
to
reduce.
MV
=
PQ
Point
A
is
at
the
boom
phase
in
the
economic
cycle.
The
economy
is
at
full
capacity,
there
is
not
much
unemployment
and
resources
are
scarce.
An
increase
in
M
(money
supply)
at
this
point
will
mean
that
output
(Q)
is
unable
to
increase
because
of
the
scarce
resources
and
so
P
(inflation)
will
increase
a
lot.
At
point
B
the
economy
is
in
a
recession
/
downturn.
There
are
a
lot
of
unemployed
resources
and
so
the
economy
is
easily
able
to
grow.
With
an
increase
in
M,
Q
(output)
is
able
to
increase
and
so
P
does
not
increase
by
much
and
so
there
is
less
inflation.
Question
3
Use
the
quantity
theory
of
money
and
the
diagram
to
explain
the
impact
of
an
increase
in
the
money
supply
at
point
A
and
point
B
in
the
business
cycle.
Check
answer.
Next
Question.
Previous
Question.
Click
to
enlarge
image.
Click
and
hold
to
reduce.
With
the
Americas
Cup
being
held
in
Auckland
there
will
be
an
increase
in
the
number
of
tourists
and
investment
by
America’s
cup
syndicates
in
N.Z.
Tourism
is
export
receipts.
Export
receipts
and
investment
are
components
of
Aggregate
Demand
.
An
increase
in
export
receipts
and
investment
will
increase
Aggregate
Demand
from
AD
to
AD2
.
This
will
increase
an
increase
in
the
price
level
from
PLe
to
PLe2
-
causing
demand
pull
inflation.
Ouput
/
employment
will
increase
from
Ye
to
Ye2.
Question
4
New
Zealand
has
won
the
Americas
Cup
and
it
is
expected
to
be
held
in
Auckland
in
2021.
Fully
explain
the
impact
of
the
Americas
Cup
being
held
in
Auckland
on
inflation.
Use
the
diagram
to
help
with
your
answer.
Check
answer.
Next
Question.
Previous
Question.
A
change
in
the
price
of
Apples
is
a
one
off
price
increase
-
it
will
only
affect
the
one
item
and
so
will
not
have
much
if
any
impact
on
the
general
price
level
/
inflation
because
it
will
not
affect
other
products.
Electricity
is
a
major
cost
of
production
as
well
as
being
used
by
all
households
and
so
will
affect
many
firms
whose
production
costs
will
increase
causing
them
to
increase
their
prices
to
maintain
their
profit
margins.
This
will
cause
the
AS
curve
to
shift
left
leading
to
cost
push
inflation.
Question
5
Fully
explain
the
different
effects
on
the
general
price
level
measured
by
the
Consumer
Price
Index
(CPI)
of
an
increase
electricity
prices
and
an
increase
in
the
price
of
Oranges.
In
your
answer,
explain:
•
how
electricity
prices
can
result
in
a
change
in
inflation
and
why
an
increase
in
the
price
of
apples
may
not
cause
a
change
in
inflation.
Check
answer.
Next
Question.
Previous
Question.
Click
to
enlarge
image.
Click
and
hold
to
reduce.
Inflationary
expectations
will
mean
that
consumers
will
buy
now
rather
than
later.
This
will
increase
the
velocity
of
money
as
consumers
spend
more
causing
an
increase
in
P
and
inflation.
Inflationary
expectations
will
cause
an
increase
in
consumption.
Consumption
is
a
component
of
AD
and
so
AD
will
increase
from
AD
to
AD2
creating
demand
pull
inflation
.
An
depreciation
of
the
NZ
dollar
will
make
NZ
exports
cheaper
for
overseas
buyers
and
so
export
receipts
will
increase.
Export
receipts
are
a
component
of
AD
and
so
AD
will
increase
from
AD
to
AD2
causing
demand
pull
inflation.
With
a
depreciation
the
cost
of
imported
raw
materials
will
also
increase.
This
will
cause
an
increase
in
firms
costs
of
production
and
so
AS
will
decrease
from
AS
to
AS2.
Firms
will
increase
prices
to
maintain
profit
margins
creating
cost
push
inflation.
A
depreciation
will
cause
the
price
level
to
increase
from
PLe
to
PLe2
and
output
to
decrease
from
Y
e
to
Ye2
.
Question
6
Compare
and
contrast
the
impact
on
inflation
of
increasing
inflationary
expectations
with
the
impact
of
a
depreciation
of
the
New
Zealand
dollar.
Use
the
graph
below
in
your
answer.
Check
answer.
Next
Question.
Previous
Question.
With
high
inflation
people
who
have
borrowed
money
to
buy
a
new
home
will
better
off
as
the
real
value
of
the
money
they
have
borrowed
will
decrease
meaning
that
the
real
amount
they
will
have
to
pay
back
will
be
less.
Also
the
value
of
the
home
they
have
purchased
will
be
increasing
in
value
so
their
mortgage
as
a
percentage
of
value
of
their
home
will
be
less.
However,
during
high
inflation
interest
rates
may
be
increasing
-
increasing
their
mortgage
repayments.
People
in
retirement
may
be
worse
off
as
the
value
of
their
savings
will
decrease
in
value
with
high
inflation.
Also
their
real
interest
rate
may
be
less
and
so
they
will
be
worse
off
as
their
real
interest
income
decreases.
Businesses
who
export
will
be
worse
off
as
their
costs
of
production
will
increase
leading
to
an
increase
in
the
prices
of
the
goods
they
export.
This
will
make
them
less
competitive
and
reduce
demand
for
their
product.
Their
profits
will
fall
as
they
export
less.
Businesses
who
produce
only
for
the
NZ
market
will
see
the
price
they
receive
for
their
product
increase
but
their
costs
of
production
may
also
increase
and
so
they
may
be
a
bit
better
off
or
a
bit
worse
off
or
no
change.
Question
7
Compare
and
contrast
the
different
effects
of
a
period
of
high
inflation
on:
•
people
who
have
borrowed
money
to
buy
a
home
AND
people
in
retirement
who
use
their
savings
as
a
source
of
interest
income
•
New
Zealand
businesses
producing
for
the
New
Zealand
market
AND
New
Zealand
businesses
producing
for
export.
Check
answer.
Previous
Question.