3. Inflation & Price Stability(Ch7&10-11)

Principles of Macroeconomics (with Xtra!)

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I nflation is a persistent rise over time in the average price of goods and services—in the “cost of living.” Inflation and the risk of inflation encourage certain types of spending and investment decisions. A situation where inflation is low enough so that it no longer affects peoples’ economic decisions is referred to as price stability. The most widely used measure of inflation is the consumer price index (CPI) . It reflects changes in the price of a representative “basket” of goods and services sold in Canada—food, housing, transportation, clothing, recreation and other items that Canadians buy. The inflation rate is expressed as a percentage increase in average prices over a year. For example, if the cost of the CPI “basket” rises from $100 one year ago to $102 today, the current inflation rate is 2 per cent. When the CPI rises, the purchasing power of the average consumer dollar falls.
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