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Inflation

What is Inflation?

Increase in the general prices of goods and services.

It is measured as an annual percentage increase.

A healthy economy aims for a 2% inflation rate.

Inflation occurs when the demand for goods and services rises faster than they can be produced.
Prices of goods β†’ Go up
Value of goods β†’ Goes down

If the inflation rate is 3% annually, a packet of Ramen that costs $1 in the beginning of the year will cost $1.03 by the end of the year.

Causes of Inflation

  • Problems with supply
  • Problems with demand
  • Problems with key raw materials
  • Monetary policy

Effects of Inflation

  • Uncertainty in the market
  • Higher income taxes
  • Financial hardship on workers

Is inflation good or bad?

Positive effects

  • Gives people an incentive to spend and invest knowing that their money will incease in value
  • Increased spending and investment can benefit the economy

Negative effects

  • Increase in the opportunity cost of holding money
  • Shortage of goods as consumers begin hoarding out concern that prices will increase in the future

Examples

Average price for one gallon of milk $.20 in 1940 β†’ $3.31 in 2015


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