1. Inflation

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

3. 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

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

5. 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

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

7. 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

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