Low and Stable Inflation
Macroeconomic Objectives
AO2·AO4·Diagram required
Syllabus requirement
Measurement using CPI, causes of inflation (demand-pull, cost-push), causes of deflation, and associated economic impacts.
Assessment objectives
AO2 Application and AnalysisAO4 Use of Appropriate Skills
Required diagram: Demand-pull inflation diagram.Cost-push inflation diagram.Deflation diagram.
Summary
This section explains what inflation is, why governments aim for a low and stable rate, and how inflation is measured using the consumer price index (CPI). It outlines how CPI is constructed with statistical weights, shows simple index calculations, and discusses key limitations of using CPI to represent changes in the cost of living. It also introduces hyperinflation and the main demand-side cause of inflation (demand-pull), linking inflation to aggregate demand. Understanding these points helps evaluate price stability as a macroeconomic objective.
