2(Inflation) (2.1)

Page 1: Introduction to Inflation and Deflation

Inflation is the general and sustained rise in the price level of goods and services in an economy over a period of time.
Deflation is the general fall in the level of prices of goods and services in an economy over a period of time.

Types of Inflation

Cost push inflation: Results from an increase in the cost of production for businesses, causing them to push the cost onto the consumer.
- Occurs when aggregate supply exceeds aggregate demand.
Demand pull inflation: Occurs when the aggregate demand for goods and services exceeds the aggregate supply.
Fall in demand: For example, during a recession.

Cost push inflation: Increase in the cost of production for businesses.
Monetary inflation: When a central bank prints excessive money not supported by growth in the economy.

Lower prices will discourage production, leading to unemployment.
Lower purchasing power: Price rises, but due to low profits, incomes stay the same, so people can afford fewer goods and services.
Tax revenue of the government will fall, leading to an economic activity decline and a decrease in incomes.
Less competitive exports: Higher domestic prices make exports more expensive compared to foreign rivals.
Deflation will increase the real debt burden of the government as the value of debt money increases.
Costs increase, fueling inflation further: Workers demand higher pay, and companies raise prices to cover costs.

Boosts consumer and business confidence because they can plan their spending and investment without worry about price increases due to inflation.
Improves international competitiveness: With low and stable inflation, export prices will not rise as quickly as rivals, which helps reduce trade deficits and protect export-related jobs.

Inflation is the general and sustained rise in the price level of goods and services in an economy over a period of time.
Deflation is the general fall in the level of prices of goods and services in an economy over a period of time.

Cost push inflation: Results from an increase in the cost of production for businesses, causing them to push the cost onto the consumer.
- Occurs when aggregate supply exceeds aggregate demand.
Demand pull inflation: Occurs when the aggregate demand for goods and services exceeds the aggregate supply.
Fall in demand: For example, during a recession.

Cost push inflation: Increase in the cost of production for businesses.
Monetary inflation: When a central bank prints excessive money not supported by growth in the economy.

Lower prices will discourage production, leading to unemployment.
Lower purchasing power: Price rises, but due to low profits, incomes stay the same, so people can afford fewer goods and services.
Tax revenue of the government will fall, leading to an economic activity decline and a decrease in incomes.
Less competitive exports: Higher domestic prices make exports more expensive compared to foreign rivals.
Deflation will increase the real debt burden of the government as the value of debt money increases.
Costs increase, fueling inflation further: Workers demand higher pay, and companies raise prices to cover costs.

Boosts consumer and business confidence because they can plan their spending and investment without worry about price increases due to inflation.
Improves international competitiveness: With low and stable inflation, export prices will not rise as quickly as rivals, which helps reduce trade deficits and protect export-related jobs.