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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 → Go up
Value of goods → 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 → $3.31 in 2015


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