Practise IB Economics HL 3.3.5 by calculating and interpreting weighted price indices using directly evidenced marked exam questions and mark schemes.
The economy of Japan has been subject to many periods of deflation since 1993.
Consequently, price increases became unusual, and the expected inflation rate has often been close to zero. Most price rises have been the result of a depreciated yen (JPY), the currency in Japan.
An expansionary fiscal policy has not lead to a significant rise in the price level, partly because of a lack of business and consumer confidence. Therefore, the central bank, the Bank of Japan, has set a target rate of 2 % for sustainable and stable inflation.
Figure 2 plots the inflation rate against the unemployment rate in Japan for selected dates from 1993 to 2022. SRPC is the short-run Phillips curve.
Figure 2
The market structure of banks in Japan is an oligopoly. Bank A and Bank B are two commercial banks. Each bank can choose a strategy of either raising or lowering the interest rate on loans.
The cells in the payoff matrix in Table 4 show the interdependent profits that would result. The entries below the diagonal lines show Bank A's profit while the entries above the diagonal lines, in bold, show Bank B's profit.
Table 4
Assume that the two banks decide to collude and come to an agreement that would maximize their joint profits.
The consumer price index (CPI) for Tokyo (the capital city of Japan) is based on a wide range of items that the typical household in Tokyo purchased during the base year 2020. Table 2 shows some selected items in the basket of goods of a typical consumer in Tokyo, with the unit prices in JPY. The quantities purchased per week are used as weights.
Table 2
Table 3 shows the total cost of the basket of goods that the typical consumer in Tokyo purchases per week in JPY as well as the consumer price index (CPI) for Tokyo.
Table 3
The process of money creation by the commercial banks increases the money supply. The Bank of Japan can control the size of the money supply through open market operations, quantitative easing or by changing the minimum reserve requirement, which is 0.8 %.
Using Table 2, calculate the total cost of the basket of goods per week in JPY in 2023. Enter your result in Table 3.
Using Table 3, calculate the CPI for Tokyo in 2023. Enter your result in Table 3.