Low & Stable Rate of Inflation

• Inflation


  An increase in the average price level of goods and services in an economy over time
• Price stability


  When the general level of prices remains largely constant due to a low and stable rate of inflation
• Inflation reduces the purchasing power of money and a country's international competitiveness.
• Hyperinflation (or runaway inflation)


  High and uncontrollable rates of inflation that cause major macroeconomic problems
• Volume of quantities purchased (CPI)


  The more frequently a product is purchased, the more it is deemed important to the average household and thus, is assigned greater weight.
• Value of quantities purchased (CPI)


  The greater the proportion of a household's overall spending on a product, the more it is deemed important and thus, is assigned greater weight.
• Calculating changes in the CPI will give the rate of inflation.
• When calculating inflation, the years are compared to a base year whose price index is 100.

  E.g. A price index of 120 in some year means that prices have increased by 20% since the base year.
• Money supply


  The amount of money within the circular flow of the economy as determined by the central bank
• Demand-pull inflation


  Inflation caused by an increase in AD without an increase in AS, raising the general price level
• Cost-push inflation


  Inflation cause by higher costs of production, i.e. a leftwards shift in the SRAS curve, raising the general price level
• • Keynesians believe that increases in AD must be controlled to prevent inflation.
  • Monetarists believe that money supply must be controlled to prevent inflation.
• $\frac{CPI_2-CPI_1}{CPI_1}$$=$rate of inflation
• Cost-push inflation

  
• Demand-pull inflation

  
• Consumer price index (CPI)


  A price index measuring the value of a basket of goods for an average consumer. It is used to measure inflation through a weighted index. E.g. a good deemed more important is assigned a greater weight.
• CPI is calculated by dividing the price of a basket of goods in some year by the price of a basket of goods in the base year.