I) Inflation Inflation-A sustained rise in the general level of prices. The value of currency is constantly decreasing. Conversely, prices of all consumer goods are constantly increasing.

A) Hyperinflation Hyperinflation or high inflation can be devastating to an economy- Post WWI Germany ( ) Printed out money to pay France & UK their war debt rather than taxing.

B) Low Inflation Low inflation can be beneficial to an economy (1-3%) Indicates moderate growth in the economy

c) Inflation leads to speculation 1) Helps debtors (mortgages decrease in relative value over time) 2) Hurts creditors & people with fixed income.

II) What causes inflation? A) Demand pull inflation- A rise in the general level of prices caused by too high a level of aggregate demand in relation to aggregate supply. This is continuously happening because of a constant increase in population and an increase in relative wealth. D1 S E1 Quantity PRICEPRICE E2 D2 Shortage

b) Cost push inflation A rise in the general level of prices that is caused by increased costs of making and selling goods. A shortage is created that causes prices to rise when supply is restricted. S1 D E1 Quantity PRICEPRICE E2 S2 Shortage

III) Deflation A) A decline in the average level of prices B) Only a problem in Depressions C) Caused by an overall drop in aggregate demand. E1 E2 Quantity PRICEPRICE S D1 D2 Surplus

IV) CPI Consumer Price Index A catalogue of prices of numerous items It’s used to track inflation over the years