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OTE2601 Assignment 2 2024
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OTE2601 Assignment 2 2024
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PROSTUDENT
, Name of module ECONOMICS MANAGEMENT SCIENCES
Module code(s) OTE2601
ASSIGNMENT 2 QUESTIONS
QUESTION 1
Inflation is the word used to indicate a drop in the buying power of money as a result
of a general rise in prices of goods and services. In simple terms, inflation is an
increase in prices over a period of time. Inflation is what makes your money worth less
over time – it is your money’s biggest enemy. It reduces the buying power of money
month by month and year by year.
1.1 How does inflation affect the consumer? Elaborate on the most important
characteristics of inflation
(Study guide pg. 16)
Reduced Purchasing Power:
As prices rise, the same amount of money buys fewer goods and services.
Consumers find that their money doesn’t stretch as far, leading to a decrease in their
standard of living. For instance, if the price of groceries, fuel, and other essentials
increases, people may have to cut back on discretionary spending such as
entertainment or dining out.
Rising Cost of Living:
The overall cost of maintaining a certain standard of living increases as prices for
basic necessities like housing, food, and healthcare go up.
This can be particularly challenging for those on fixed incomes, such as retirees,
whose income does not increase at the same rate as inflation. They may struggle to
afford the same quality of life.
Wage-Price Spiral:
As prices rise, workers demand higher wages to keep up with the increased cost of
living. Employers then raise prices to cover the higher wage costs.
This creates a cycle of increasing wages and prices, which can perpetuate inflation.
Consumers may initially benefit from higher wages, but these gains are often offset
by higher prices.
Interest Rates and Borrowing Costs:
Central banks may raise interest rates to control inflation, making borrowing more
expensive.
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