TCE Economics — Level 3
Inflation — Flashcards & Quiz
Inflation is a sustained rise in the general price level, measured in Australia by the CPI produced by the ABS. TCE Economics Level 3 expects you to distinguish demand-pull from cost-push inflation, explain the costs of inflation to different groups, and assess monetary policy responses. Ground your discussion in real RBA commentary and recent CPI data for strong marks.
Sample Flashcards
Q1: Define inflation and explain demand-pull inflation.
Inflation is a sustained increase in the general price level over time, measured by the CPI. Demand-pull inflation is caused by excessive AD growth outpacing supply — "too much money chasing too few goods." AD shifts right beyond full employment, pushing up the price level. Causes include: increased consumer spending, government spending, investment booms, or export surges.
Q2: Explain cost-push inflation and its consequences.
Cost-push inflation is caused by increases in production costs (wages, raw materials, energy, imported inputs) that reduce aggregate supply. SRAS shifts left, pushing up the price level while reducing real GDP. This combination of rising prices and falling output is called stagflation. Cost-push inflation is harder to address because contractionary policy reduces output further.
Q3: Explain the economic costs of high and unpredictable inflation.
Costs include: (1) reduced purchasing power — fixed incomes lose real value, (2) menu costs — businesses must frequently update prices, (3) shoe-leather costs — people spend effort managing cash, (4) uncertainty — discourages investment and long-term contracts, (5) distortion of price signals, (6) international competitiveness declines — exports become relatively more expensive, (7) fiscal drag — taxpayers pushed into higher brackets.
Sample Quiz Questions
Q1: Demand-pull inflation occurs when aggregate demand grows faster than aggregate supply.
Answer: TRUE
When AD outpaces the economy's productive capacity, excess demand bids up prices — "too much money chasing too few goods."
Q2: Cost-push inflation shifts the aggregate demand curve to the left.
Answer: FALSE
Cost-push inflation shifts the SRAS curve to the left (not AD). Rising production costs reduce supply at every price level, pushing up the general price level.
Q3: Unexpected inflation benefits borrowers at the expense of lenders.
Answer: TRUE
Unexpected inflation reduces the real value of debt repayments. Borrowers repay in dollars worth less than when they borrowed, while lenders receive less real purchasing power.
Last updated: March 2026 · 3 flashcards · 3 quiz questions