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Unformatted text preview: I nflation is an increase in the average level of prices, not a change in any specific price. The average price is determined by finding the average price of all output. A rise in the average price is called inflation . A fall in the average price is called deflation . Relative price is the price of one good in comparison with the price of other goods. Nominal income is the amount of money income received in a given time period, measured in current dollars. Real income is income in constant dollars: nominal income adjusted for inflation. Not all prices rise at the same rate during inflation. Not everyone suffers equally from inflation. The use of nominal dollars rather than real dollars to gauge changes in ones income or wealth is called the money illusion . In addition to redistributing income and wealth, inflation has macroeconomic effects as well Time horizons are shortened as people attempt to spend money before it loses further value.further value....
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