DSST Money & Banking Part 1

2 inflation can also be described as a decline in the

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[2]  Inflation can also be described as a decline in the real value of money—a loss of  purchasing power  in the  medium of exchange which is also the monetary unit of account. [3]  When the general price level rises, each unit of  currency  buys fewer goods and services. A chief measure of price inflation is the  inflation rate , which is the percentage  change in a  price index  over time. [4] Inflation can cause adverse effects on the economy. For example, uncertainty about future inflation may discourage  investment and saving. High inflation may lead to shortages of  goods  if consumers begin  hoarding  out of concern that  prices will increase in the future. Economists generally agree that high rates of inflation and  hyperinflation  are caused by an excessive growth of the money  supply. [5]  Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation  may be attributed to fluctuations in  real   demand  for goods and services, or changes in available supplies such as during  scarcities , as well as to growth in the money supply. However, the consensus view is that a long sustained period of  inflation is caused when money supply increases faster than the rate of  economic growth . [6] [7] Today, most economists favor a low steady rate of inflation. [8]  Low (as opposed to zero or negative) inflation may reduce  the severity of economic  recessions  by enabling the labor market to adjust more quickly in a downturn, and reducing the  risk that a  liquidity trap  prevents  monetary policy  from stabilizing the economy. The task of keeping the rate of inflation low  and stable is usually given to  monetary authorities . Generally, these monetary authorities are the  central banks  that  control the size of the money supply through the setting of  interest rates , through  open market operations , and through the  setting of banking  reserve requirements . [9] Phillips curve  is a historical inverse relation between the rate of  unemployment  and the rate of  inflation  in an  economy Stated simply, the lower the unemployment in an economy, the higher the rate of increase in wages paid to labor in that  economy. Deflation:  In  economics , Deflation is a persistent decrease in the general  price level     [1]     of goods and services, when  inflation is below zero percent, resulting in an increase in the real value of money - a negative  inflation rate . When the  inflation rate slows down (decreases, but remains positive), this is known as  disinflation . It is a substantial drop in the price  level.
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