Definition: Changes in price level over time

Inflation is a price increase, reduces buying power of the dollar

Causes of inflation

  • Demand-pull inflation (consumers demand) - demand for a good pulls the price higher if demand is higher then supply
  • Cost-push inflation (supply costs) - increased production costs push prices higher. ex: land, school, labor, capital, entrepreneurship
  • Supply shock- unexpected event changes supply- natural disaster. ex: war, flood, hurricane
  • Price expectations- buy today if you think the price will increase in the future

Measuring inflation

  • Average change over time of price of product
  • By comparing CPI from year to year economists can report inflation as up or down

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