Quick questions on Inflation in Australia: measurement, causes and effects (HSC Economics Topic 3)

Inflation is the sustained increase in the general price level of goods and services in an economy over time.

The AD/AS framework shows both causes on the same axes: the price level on the vertical axis and real output (real GDP) on the horizontal axis. A rightward shift of AD, or a leftward shift of SRAS, both raise the price level, but they move real output in opposite directions.

Excess aggregate demand pushes the economy beyond its productive capacity. AD/AS framework: a rightward shift in AD when the economy is at or near LRAS produces inflation.

Rising costs of production passed through to prices. AD/AS framework: a leftward shift in SRAS produces inflation and lower output (stagflation in extreme cases).

Rising prices of imported goods and services, often driven by exchange rate depreciation or global shocks.

When households and businesses expect future inflation, they negotiate higher wages and set higher prices, validating the expectation. The RBA monitors inflation expectations from union surveys, financial markets and consumer surveys.

Wage and price contracts make inflation slow to adjust. Service inflation (40 percent of CPI) is particularly sticky because of long-term contracts and labour-intensive cost structures.

A rightward AD shift (demand-pull) and a leftward SRAS shift (cost-push) both raise the price level but move real GDP in OPPOSITE directions - showing you know this distinction is worth marks even in a short-answer response.

Replace "inflation went up" with "headline CPI peaked at 7.8 percent in the December quarter of 2022 (ABS)"; replace "the RBA raised rates" with "the cash rate rose from 0.10 percent to 4.35 percent between May 2022 and November 2023".