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Unformatted text preview: productivity 7. Potential GDP on average grows by 3-4 % per year- this is the " speed limit " of the economy i.e. the amount of economic growth possible without creating growth inflation INFLATION-----------------1. Inflation=widespread rise in prices 2. Three Major causes of inflation (1) " GROWTH INFLATION " Inflation caused by economic growth - inflation is an unwelcome byproduct of economic growth (2) " POLICY INFLATION " Inflation caused by economic policy (3) " OUTSIDE INFLATION " Inflation caused by outside the U.S. economy 3. GROWTH INFLATION (1) As production grows there is a need for more inputs of physical capital + labor + materials + finacial calpital (2) Ultimately input shortages develop (3) Then firms must pay more to get the inputs (4) Passed on to consumers as higher prices (5) Growth inflation gets more severe as economy operates closer to its full capacity...
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- Winter '08