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Explain the concept of the consumer price index (CPI) and explain how it is measured. What is the latest CPI figures in Australia (Sept 2012)?

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Introduction

ECON1102 SUMMER SCHOOL 2012/2013 SUBMISSION QUESTION 1: DUE: FRIDAY 21 DECEMBER, 2012 BY 5PM. 1. Explain the concept of the consumer price index (CPI) and explain how it is measured. What is the latest CPI figures in Australia (Sept 2012) and what were the main factors influencing the CPI movements in this quarter. 1. Is the CPI an accurate measure of inflation? Explain the importance of inflation when calculating the real interest rate. 1. What are the economic costs of inflation? 1. Is deflation a potentially more serious problem than inflation? In writing your answer you should refer to Chapter 1 of the textbook and the article ?Inflation, deflation and all that? available on the Macroeconomics 1 website in Week 1: Unit 1 readings. For the latest statistics refer the Australian Bureau of Statistic website: http://www.abs.gov.au This question will be marked out of 20, but will contribute to 6 % of your assessment. ...read more.

Middle

(Bernanke, Olekalns&Frank 2011) According to ABS, The CPI figures in Australia in September 2012 is 182.9, it increaed1.4% in this quarter, compared with an increase of 0.5% in the previous quarter (June 2012). The ASB also states ?The most significant price rises this quarter were for electricity (+15.3%), international holiday travel and accommodation (+6.6%) and medical and hospital services (+4.5%). The most significant price falls these quarters were for automotive fuel (-3.9%) and motor vehicles (-1.0%).?(ABS 2012) (2): One of the most important aims of CPI is to measure the change in the cost of living and the change in the value of currency. In order to measure these changes, the inflation rate is needed. It is calculated by using the CPI figures. The inflation rate refers to the percentage change of CPI during a specific time period. The CPI can also be called the cost of living index. When calculating the amount of money that the households need to pay in order to achieve a certain living standard, CPI has two main limitations. ...read more.

Conclusion

GR Stevens, ? deflation is a generalized and persistent decline in most, if not all, prices for goods and services. More likely than not this, if it occurred, would be accompanied by declines in prices for many real assets and pressure for, even if not the actuality of, declines in wage and salary incomes.? (Mr. GR Stevens 2002,p11) Deflation can be a problem when it relates to the real interest rate. The real interest rate can be calculated by deduct inflation rate from nominal interest rate. Economists states that the nominal interest should not fall below zero, in this circumstance, If the inflation falls become negative to deflation, then, the real interest rate figure should not smaller than the deflation figure, otherwise, the nominal interest rate will below zero. In this situation, the problem of deflation will occur when the nominal interest is under the zero limits. The real interest rate has to increase to match the increase of deflation. In addition, when the real interest rate increases, people tend to spend less in the economy, it may also cause problem for certain kind of government policy to implement. ...read more.

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