Overview
This lesson introduces the concept of inflation, its definitions, types, related economic terms, and includes example scenarios to clarify concepts.
Definition and Nature of Inflation
- Inflation is a continuous and considerable rise in the general price level of goods and services over time.
- Inflation is not a once-off event but a sustained increase in prices.
- It affects the purchasing power of money, meaning money buys fewer goods over time.
- Inflation is typically measured as an annual percentage rate.
Types of Inflation
- Demand-Pull Inflation occurs when demand for goods exceeds supply, often due to increased spending by consumers, businesses, or government.
- This type is described as "too much money chasing too few goods."
- Cost-Push Inflation happens when production costs (like labor or materials) rise significantly, leading producers to increase prices.
Related Economic Terms
- Hyperinflation is an extremely rapid and out of control inflation, exceeding 50% per month or 100% over three years.
- Stagflation is when high inflation and high unemployment occur together, making it difficult for governments to address both issues.
- Deflation is a continual decrease in the general price level, where the inflation rate falls below 0%.
- Disinflation refers to a fall in the rate of inflation (prices still rise, but more slowly).
- Reflation is stimulating the economy to increase the price level back up to the long-term trend after a downturn.
Key Terms & Definitions
- Inflation — Continuous, considerable rise in the general price level over time.
- Demand-Pull Inflation — Price rise due to demand outpacing supply.
- Cost-Push Inflation — Price rise due to increased production costs.
- Hyperinflation — Extremely rapid, excessive price increases.
- Stagflation — Simultaneous high inflation and high unemployment.
- Deflation — Continuous decrease in the general price level.
- Disinflation — Decrease in the rate of inflation.
- Reflation — Economic stimulation to restore price levels.
Action Items / Next Steps
- Complete Activity 87 on page 214, questions 1-4 (including analyzing a graph for inflation, deflation, and disinflation).
- Review terms and ask questions if any are unclear.