Foundation of Economics tw 7 Inflation Q1

Westminster International University in Tashkent

Foundation of Economics
TW 7
Inflation
Q1. Price Index

Basic Market Basket Item	Number of units	Year 1		Year 2		Year 3
		Price per unit ($)	Cost of market basket ($)	Price per unit ($)	Cost of market basket ($)	Price per unit ($)	Cost of market basket ($)
Cheese	2 kg	10	20	11	22	12	24
Butter	5 kg	10	50	13	65	14	70
Sausages	10 kg	5	50	6.6	66	8	80
Total Expenditure	___		120		153		174

1. Fill in the table.

2. If Year 1 is selected as the base year, the index number for Year 1 is ($120 / $120) x 100 = 100.
The index number for Year 2 is _______________127.5_________________________

1. 
   The index number for Year 3 is _____________145___________________________
   

3. These index numbers indicate that there was a 27.5 percent increase in prices between Year 1 and Year 2.

1. 
   What is the percentage increase between Year 1 and Year 3?
   
2. 
   What is the percentage increase between Year 2 and Year 3?
   

4. Do the index numbers change when the base year is changed from Year 1 to Year 2? yes
5. Does the percentage change in prices between years change when the base year is changed from Year 1 to Year 2? Why or why not? No. relative change remains the same

Q2. Will the following lead to cost-push or demand-pull inflation, or both? Why?

1. 
   There is a rapid rise in the oil price on world markets causing inflation.
   

Cost-push / Demand-pull / Both

2. 
   Sanctions on Russia Economy because of war in Ukraine lead to the sharp exchange rate depreciation, causing inflation.
   

Cost-push / Demand-pull / Both

3. 
   Number of big businesses in the local market increase their monopoly power and prices of various goods increase.
   

Cost-push / Demand-pull / Both

4. 
   Cuts in the mortgage rate increase people's disposable income and this leads to inflation.
   

Cost-push / Demand-pull / Both

5. 
   Poor harvest pushes the price up and causes inflation.
   

Cost-push / Demand-pull / Both

6. 
   Rapid economic growth increases wages and as a result prices go up.
   

Cost-push / Demand-pull / Both
Q3. Who Is Hurt and Who Is Helped by Unanticipated Inflation?

Fill in the blank for each sentence with either H, G , or U.

H means the person or group is hurt by unanticipated inflation
G means the person or group gains from unanticipated inflation
U means it is uncertain if the person or group is affected by unanticipated inflation or if the effects are unclear.

_____h____1. Banks extended many fixed rate loans.

______g___2. A farmer buys machinery with a fixed-rate loan to be repaid over a 10-year period.

______u___3. Your family buys a new home with an adjustable-rate mortgage.

_____h____4. Your savings from your summer job are in a savings account paying a fixed rate of interest.

______h___5. A widow lives entirely on income from fixed-rate corporate bonds.

_____u____6. A retired official lives entirely on income from stock dividends.

_____g____7. The federal government has a $5,000,000,000 debt.

_____h____8. A firm signs a contract to provide maintenance services at a fixed rate for the next five years.

____g____9. A state government receives revenue mainly from a progressive income tax.

With inflation wages also grow, which leads to higher taxation in progressive tax system.
____u____10. A state government receives revenue mainly from a flat rate income tax.
In Uzbekistan we have flat rate income tax from 2020. So, it depends if wage increase surpasses inflation rate or not. In case WIUT wage increase was about at official interest rage (and much below perceived inflation rate). So uncertain.

_____g___11. Your friend rents an apartment with a three-year lease.

___h_____12. A bank has loaned millions of dollars for home mortgages at a fixed rate of interest.

____u____13. Parents are putting savings for their child’s college education in a bank savings account.
It depends if saving account pays fixed or adjustable interest rate. If fixed parents lose, if adjustable it depends.

Activity 4.

Discuss the video Inflation in Turkey
https://youtu.be/Dqjj6FNel80

You may explain it using graph with interest rate, money supply (vertical line) and demand.

Activity 5 (optional – discuss article, in Seminar 7 handouts)

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