Inflation.docx - INFLATION Inflation is best defined as a...

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INFLATION Inflation is best defined as a sustained increase in the general price level leading to a fall in the purchasing power or value of money (not all prices rise at the same rate, and some may fall). The rate of inflation is measured by the annual percentage change in the level of consumer prices. The main index used to measure inflation is the Consumer Price Index (CPI). The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer. To measure inflation, subtract last year’s price index from this year’s price index and divide by last year’s index; then multiply by 100 to express as a percentage. CPI in Year 2 – CPI in Year 1 Inflation rate in Year 2 = ------------------------------------- X 100 CPI in Year 1 The main causes of inflation Demand-pull inflation Demand-pull inflation is likely when there is full employment of resources and aggregate demand is increasing at a time when SRAS is relatively inelastic. This is shown in the diagram:

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