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Inflation
General and continuing rise in prices measured as a rate.
Deflation
A fall in prices or an economic slowdown.
Aggregate demand
Total demand in the economy from consumers, businesses, government, and foreign buyers.
CPI (Consumer Price Index)
A measure of the general price level.
Demand pull inflation
Inflation caused by an increase in demand in the economy.
Cost pull inflation
Inflation caused by rising business costs.
Interest rates
Price paid to lenders for borrowed money.
Monetarists
Economists who believe there is a strong link between growth in the money supply and inflation.
Money supply
The stock of notes and coins, bank deposits, and other financial assets in the economy.
Menu costs
The non-monetary costs incurred by firms due to frequently changing prices.
Shoe leather costs
The non-monetary costs for individuals and businesses of shopping around to find the best prices.
Hyperinflation
A situation where prices spiral out of control, leading consumers to rush to buy before prices increase further.
Tradeoff between inflation and unemployment
The relationship where rising inflation can reduce unemployment, but may lead to higher costs.
Wage/price spiral
A cycle where rising wages lead to higher production costs, subsequently driving up prices.
Impacts of Inflation
Includes rising prices, increased wage demands, difficulties in exporting, and potential job losses.
Impact of Inflation on Prices
Inflation leads to a general increase in prices for goods and services, eroding consumers' purchasing power.
Impact of Inflation on Wages
Workers often demand higher wages to keep up with inflation, resulting in increased labor costs for businesses.
Impact of Inflation on Exports
Rising domestic prices can decrease competitiveness of exports, as foreign buyers find domestic goods more expensive.
Impact of Inflation on Unemployment
Inflation can lead to higher unemployment if companies cut jobs to manage increased costs associated with rising prices.
Impact of Inflation on Menu Costs
Businesses incur menu costs by frequently changing prices, which can be expensive and time-consuming.
Impact of Inflation on Shoe Leather Costs
Individuals and businesses may spend more time searching for the best prices, leading to non-monetary costs associated with the effort.
Impact of Inflation on Uncertainty
Inflation creates uncertainty in the economy, making it difficult for businesses to plan for the future effectively.
Impact of Inflation on Business & Consumer Confidence
High inflation can reduce confidence among consumers and businesses, leading to decreased spending and investment.
Impact of Inflation on Investment
Uncertainty around inflation can deter investment, as businesses may hesitate to commit resources in
Why is CPI used?
CPI is used as an economic indicator to gauge inflation, cost of living adjustments, and to inform monetary policy.
Possible causes of increased aggregate demand
Factors include increased consumer spending, government expenditure, business investments, and net exports.
Possible causes of rising business costs
Causes can include increased raw material prices, higher labor costs, and regulatory costs.
Key concept of monetarists
Monetarists believe that the money supply is the primary driver of economic activity and inflation, emphasizing the control of money supply to manage inflation.
How can interest rates be used to lower inflation (chain of reasoning)
Higher interest rates reduce borrowing because the “price of money” increases
Money supply therefore grows less quickly
Demand will therefore fall
Pressure on prices is therefore relieved
Inflation falls
Note 
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