Inflation

Aggregate Definition: In Total. For the Whole Economy (Nation) AS= Aggregate Supply AD= Aggregate Demand RGDP = Real GDP PL = Price Level

Inflation Overall price level increases over time Decreasing value of purchasing power Decreasing value of your $ Inversely: deflation is a decrease is overall price level This tends to only happen during a recession/depression

Causes of Inflation 1. Quantity Theory Too much money in Circulation Increasing prices, $ is devalued Hyperinflation: run away inflation

2. Demand-Pull Theory AD increases, PL increases Typical during expansion periods What could cause Aggregate Demand to increase? -Good Consumer expectations, lower interest rates, more exports What could cause Aggregate demand to decrease? -Lower consumer expectations, high interest rates. More imports and less exports

3. Cost-Push Theory If cost of production increases, PL increases Wage- price spiral (as wages increase, prices increase)

Measuring inflation CPI (Consumer Price Index) Measures current prices compared to previous prices Market basket: typical g/s bought by an urban consumer Used to measure inflation rate Normal inflation is 2-3% per year and indicates a growing/healthy economy

Effects of Inflation Decreased value of wages Decreased saving and investing Increasing cost of production Increasing interest rates (costs more to borrow money)