Inflation is a rise in the overall price level from "summary" of Principles of Macroeconomics by N. Gregory Mankiw
Inflation occurs when the overall price level in an economy rises. This means that, on average, prices are higher than they were before. When inflation occurs, each dollar in your wallet buys fewer goods and services than it did before. Inflation is like a hidden tax because it erodes the real value of money. There are various measures used to track inflation, such as the Consumer Price Index (CPI) and the Producer Price Index (PPI). These indices track the prices of goods and services over time to determine whether there has been an increase in the overall price level.
One common cause of inflation is excessive growth in the quantity of money. If the money supply grows faster than the economy's ability to produce goods and services, prices tend to rise. This is known as demand-pull inflation. Another cause of inflation is cost-push inflation, which occurs when the costs of production increase, leading to higher prices for consumers.
Inflation can have both positive and negative effects on the economy. A moderate amount of inflation can be a sign of a healthy, growing economy. It can encourage spending and investment, as people are motivated to buy goods and services before prices rise further. However, high inflation can erode purchasing power, leading to lower standards of living and decreased economic growth.
Central banks play a crucial role in managing inflation. They use monetary policy tools, such as adjusting interest rates and controlling the money supply, to keep inflation in check. Central banks aim to maintain price stability, which means keeping inflation low and stable over time. By doing so, they help to ensure that the economy can grow steadily and sustainably.
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