Ch 20 - Macroeconomic Objectives: Low and Stable Rate of Inflation

**Inflation**

is the sustained increase in general price levels in an economy

**Disinflation**

fall in the rate of inflation in an economy 

**Deflation**

sustained decrease in the general price levels in an economy 

**Consumer Price Index (CPI)**

the price index governments use to measure the rate of inflation

**Demand pull inflation**

occurs when a rise in aggregate demand in the economy causes pulls in the price level in the economy to increase 

**Inflationary gap**

periods of demand pull inflation lead to inflationary gap where the short run equilibrium is at a level of real GDP above the full employment level of income 

**Cost push inflation**

occurs when there is a reduction in the short run AS in the economy and price level is pushed up by rising costs 

**Wage push inflation**

when wage rises faster than output unit or average costs rise

**Raw material costs**

cost push inflation can be caused by rising commodity prices when increase the cost of manufactured goods 

**Capital costs**

if the prices of machinery and equipment 

**Deflation**

negative rate of inflation where there is sustained fall in the general level of prices in an economy 

**Demand side deflation**

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deflation can occur because of a fall in AD and typically occurs in a recession 

**Supply side deflation**

deflation that occurs on the supply side arises when the AD curve shifts to the right and leads to a higher output at lower prices

**Phillips curve**

graph which represents the rate of unemployment and rate of change of money wages. Indicated that wages tend to rise faster when unemployment is low