The 4 Macroeconomic Indicators: Inflation Causes and Cures

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Inflation is a general change in price as measured by the CPI: this is a theoretical basket of goods comparing one year with another.

5 TYPES OF INFLATION

  • Hyper inflation = inflation is very high, prices increase rapidly and currency loses its value. "Out of control".
  • High inflation = the economy is growing too fast, a sign of overheating. In the UK this is 10%.
  • Creeping inflation = prices rise slowly. This is the best rate to have. Government's target of 2%.
  • Stagflation/Zero inflation = constant prices, a sign that the economy is not growing.
  • Deflation = prices fall below 0%.

KEYNESIAN CAUSE OF INFLATION: DEMAND PULL AND COST PUSH

  • Demand pull inflation can be caused by an increase in AD (aggregate demand). This is made up of

C + I + G + (X-M)

Increase in C + I + G + X and/or decrease in M

An increase in AD causes a rightward shift of the…

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