Definition of inflation and deflation pdf

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definition of inflation and deflation pdf

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Inflation means there is a sustained increase in the price level. The main causes of inflation are either excess aggregate demand AD economic growth too fast or cost push factors supply-side factors. If the economy is at or close to full employment, then an increase in aggregate demand AD leads to an increase in the price level PL.

What are some of the factors that contribute to a rise in inflation?

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What is Inflation? Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc. Inflation measures the average price change in a basket of commodities and services over time. This is measured in percentage. The purchasing power of a currency unit decreases as the commodities and services get dearer. This also impacts the cost of living in a country.

Inflation & Deflation – Definition, Causes, Effects, Basics

Advertiser Disclosure: The credit card and banking offers that appear on this site are from credit card companies and banks from which MoneyCrashers. This compensation may impact how and where products appear on this site, including, for example, the order in which they appear on category pages. Advertiser partners include American Express, Chase, U. Bank, and Barclaycard, among others. This gradual shift in prices and wages is almost imperceptible for everyday consumers. But it has a profound effect on our livelihoods and the health of the economy around us. In economics, inflation is a general increase in prices and a decrease in the purchasing power of money.

Inflation vs. Deflation: What's the Difference?

JavaScript is currently disabled. This website is best viewed with JavaScript enabled, interactive content that requires JavaScript will not be available. Inflation is an increase in the level of prices of the goods and services that households buy. It is measured as the rate of change of those prices. Typically, prices rise over time, but prices can also fall a situation called deflation.

Inflation & Deflation – Definition, Causes, Effects, Basics

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In economics , deflation is a decrease in the general price level of goods and services. Inflation reduces the value of currency over time, but sudden deflation increases it. This allows more goods and services to be bought than before with the same amount of currency. Deflation is distinct from disinflation , a slow-down in the inflation rate, i. Economists generally believe that a sudden deflationary shock is a problem in a modern economy because it increases the real value of debt, especially if the deflation is unexpected.

The common measure of inflation is the inflation rate , the annualized percentage change in a general price index , usually the consumer price index , over time. Economists believe that very high rates of inflation and hyperinflation are harmful, and are caused by an excessive growth of the money supply. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities. Inflation affects economies in various positive and negative ways. The negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include reducing unemployment due to nominal wage rigidity , [12] allowing the central bank more leeway in carrying out monetary policy , encouraging loans and investment instead of money hoarding, and avoiding the inefficiencies associated with deflation. Today, most economists favor a low and steady rate of inflation.

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