Module 5: Primary Goals asses state of MacroEcon: Inflation

• Inflation

  An economic concept that refers to increases in the price level of goods over a set period of time. Signifies that the currency in a given economy loses purchasing power.
• The causes for inflation in the short term and medium term remain a contested
• Inflation in the long term

  Caused by changes in the money supply
• Deflation

  A decrease in the general price level of goods and services. Deflation is negative inflation. When it occurs, the value of currency grows over time.
• Consumer Price Index (CPI)

  The most commonly cited measure of inflation. A statistical estimate of the level of prices of goods and services bought for consumption by households.
• Effects of Inflation

  • Decrease in unemployment
  • Decrease in the real value of debt
• Inflation targeting

  A common practice among central banks globally that aims to influence the level of prices in an economy through the use of several monetary policy tools. The main tools used are interest rates, reserve requirements, and open-market transactions.
• Real output


  The aggregate amount of goods and services produced, adjusted for price-level changes.
• Nominal output

  The aggregate amount of goods and services measured at current prices.
• Types of Inflation

  • Hyperinflation (more than 50% a month)
  • Galloping Inflation (more than 10%)
  • Walking Inflation (3% to 10% in a year)
  • Creeping Inflation (3% or less)
• Classification of Inflation

  • Demand-Pull Inflation (consumer demand exceeds production capacity)
  • Cost-Push Inflation (production costs increase prices)
  • Built-in Inflation (prices rise and wages increase to maintain living costs)
• Inflation is better than deflation
• Inflation is a sign of a healthy economy
• Inflation allows real wage adjustment
• Inflation allows adjustment of prices