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…