Inflation
Definition
Inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time. It means that, on average, prices are rising and the purchasing power of money is decreasing.
Analogy
Imagine you have a jar of cookies and every day someone adds more cookies to it. As more cookies are added, the total number of cookies increases, making each cookie less valuable. This is similar to inflation where as more money is printed or circulated in the economy, the value of each dollar decreases.
Related terms
Deflation: Deflation is the opposite of inflation. It refers to a sustained decrease in the general price level of goods and services in an economy over time. Prices decrease and the purchasing power of money increases.
Consumer Price Index (CPI): CPI measures changes in the average prices paid by consumers for a basket of goods and services over time. It helps track inflation rates and provides insights into changes in purchasing power.
Hyperinflation: Hyperinflation occurs when there is an extremely rapid increase in prices within an economy. It often leads to a loss of confidence in currency and can have severe economic consequences.
"Inflation" appears in:
Study guides (8)
AP Macroeconomics - 2.5 Costs of Inflation
AP Macroeconomics - 2.6 Real vs Nominal GDP
AP Macroeconomics - 2.7 Business Cycles
AP Macroeconomics - 3.9 Automatic Stabilizers
AP Macroeconomics - 4.2 Nominal vs. Real Interest Rates
AP Macroeconomics - 5.3 Money Growth and Inflation
AP Macroeconomics - 5.7 Public Policy and Economic Growth
AP Macroeconomics - 6.5 Changes in the Foreign Exchange Market and Net Exports
Additional resources (1)
Practice Questions (19)
- Which of the following is an example of a price index used to measure inflation?
- What is the term used to describe the decrease in the value of the individual dollar over time due to inflation?
- Who may find it difficult to keep up with rising prices if their income does not increase at the same rate as inflation?
- Which group may consider investing in assets expected to increase in value at a rate higher than the inflation rate to protect against the effects of inflation?
- Which group may find it difficult to keep up with rising prices if their income does not increase at the same rate as inflation?
- Which measure of GDP adjusts for the impact of inflation?
- Which phase of the business cycle is characterized by low unemployment and rising inflation?
- What is inflation?
- What can cause inflation in an economy?
- How do automatic stabilizers help prevent inflation during an economic boom?
- Which of the following is a potential consequence of high inflation?
- When unemployment is high, inflation tends to be:
- In the long run, is there a trade-off between inflation and unemployment?
- What happens to inflation and unemployment when there is an increase in aggregate demand (AD)?
- What is the relationship between the growth rate of money and inflation in the long run according to the quantity theory of money?
- Which one of the following could be a possible result of inflation?
- What is a likely result of sustained inflation in an economy?
- What is a potential drawback of high inflation?
- What effect does inflation have on exchange rates?
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