Economics: Understanding Inflation

Study Notes

Definition: A sustained increase in the general price level of goods and services in an economy over a period of time.
Causes:
- Demand-pull inflation: Excessive demand for goods and services drives up prices.
- Cost-push inflation: Increase in production costs, such as raw materials or labor, leads to higher prices.
- Monetary policy: Excessive money supply or low interest rates can lead to inflation.
- Supply chain disruptions: Shortages or bottlenecks in supply chains can drive up prices.
Effects:
- Reduces purchasing power: Inflation erodes the value of money, making it harder for individuals to afford goods and services.
- Uncertainty: Inflation can make it difficult for businesses and individuals to predict future costs and revenues.
- Inequality: Inflation can benefit borrowers at the expense of savers, and can disproportionately affect certain groups, such as fixed-income earners.
Measures:
- Consumer Price Index (CPI): Tracks changes in the average price of a basket of goods and services.
- GDP Deflator: Measures the average price of all goods and services produced within an economy.

Definition: A sustained decrease in the general price level of goods and services in an economy over a period of time.
Causes:
- Decrease in aggregate demand: Reduced spending and investment lead to lower prices.
- Increase in productivity: Improved production efficiency can lead to lower prices.
- Monetary policy: Tight monetary policy, such as high interest rates, can reduce money supply and lead to deflation.
- Globalization: Increased global competition can lead to lower prices.
Effects:
- Increased purchasing power: Deflation increases the value of money, making it easier for individuals to afford goods and services.
- Debt burden: Deflation can increase the burden of debt, as the value of the debt increases over time.
- Reduced spending: Expectations of future price drops can lead to reduced spending and investment.
Measures:
- Same as inflation measures, but with a focus on decreasing prices.

Definition: A sustained increase in the general price level of goods and services in an economy over a period of time.
Demand-pull inflation: Occurs when aggregate demand exceeds the available supply, driving up prices.
Cost-push inflation: Results from increase in production costs, such as raw materials or labor, leading to higher prices.
Monetary policy: Excessive money supply or low interest rates can lead to inflation.
Supply chain disruptions: Shortages or bottlenecks in supply chains can drive up prices.
Reduces purchasing power: Inflation erodes the value of money, making it harder for individuals to afford goods and services.
Uncertainty: Inflation makes it difficult for businesses and individuals to predict future costs and revenues.
Inequality: Inflation can benefit borrowers at the expense of savers, and can disproportionately affect certain groups, such as fixed-income earners.

Consumer Price Index (CPI): Tracks changes in the average price of a basket of goods and services.
GDP Deflator: Measures the average price of all goods and services produced within an economy.

Definition: A sustained decrease in the general price level of goods and services in an economy over a period of time.
Decrease in aggregate demand: Reduced spending and investment lead to lower prices.
Increase in productivity: Improved production efficiency can lead to lower prices.
Monetary policy: Tight monetary policy, such as high interest rates, can reduce money supply and lead to deflation.
Globalization: Increased global competition can lead to lower prices.
Increased purchasing power: Deflation increases the value of money, making it easier for individuals to afford goods and services.
Debt burden: Deflation can increase the burden of debt, as the value of the debt increases over time.
Reduced spending: Expectations of future price drops can lead to reduced spending and investment.