628 PART TEN MONEY AND PRICES IN THE LONG RUN Accumulated over so many years, a 5 percent annual inflation rate leads to an 18-fold increase in the price level. Inflation may seem natural and inevitable to a person who grew up in the United States during the second half of the twentieth century, but in fact it is not inevitable at all. There were long periods in the nineteenth century during which most prices fell—a phenomenon called deflation. The average level of prices in the U.S. economy was 23 percent lower in 1896 than in 1880, and this deflation was a major issue in the presidential election of 1896. Farmers, who had accumulated large debts, were suffering when the fall in crop prices reduced their incomes and thus their ability to pay off their debts. They advocated government policies to re-verse the deflation. Although inflation has been the norm in more recent history, there has been substantial variation in the rate at which prices rise. During the 1990s, prices rose at an average rate of about 2 percent per year. By contrast, in the 1970s, prices rose
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.