CHAPTER 2

INFLATION

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  • What inflation is and how it is measured
  • How prices are determined by demand and supply
  • How inflation can be caused by higher spending or rising costs
  • Why both inflation and deflation can be bad for an economy
  • The extremes of deflation and hyperinflation
  • Why inflation expectations are important

WHAT IS INFLATION?

Pick up almost any economics textbook and you will find this definition of inflation: it is a rise in the general level of prices in an economy sustained over time. There are two words that are particularly important here – general and sustained. We use the word general to get across that we are not talking about ...

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