Inflation, Deflation

Lesson

Inflation is the rate at which the general level of prices for goods and services rises, while deflation is the opposite, a decrease in the general price level of goods and services.

Practice Question #1

Which of the following is an example of cost-push inflation?

A) An increase in consumer demand for a popular product

B) A decrease in the supply of a key raw material

C) A decrease in the money supply

D) An increase in government spending

Select an option above to see an explanation here.

A) Increased consumer demand for a popular product is an example of demand-pull inflation. B) A decrease in the supply of a critical raw material can lead to higher production costs, which can cause cost-push inflation. C) A decrease in the money supply can lead to deflation, not inflation. D) Increased government spending can contribute to demand-pull inflation, not cost-push inflation.

Terms

Inflation:: A sustained increase in the general price level of goods and services in an economy over a period of time.
Deflation:: A sustained decrease in the general price level of goods and services in an economy over a period of time.
Consumer Price Index (CPI):: A measure that examines the weighted average prices of consumer goods and services, such as transportation, food, and medical care.
Producer Price Index (PPI):: A measure of the average change over time in the selling prices received by domestic producers for their output.
Demand-pull inflation:: Inflation occurs when demand for goods and services exceeds supply, causing prices to rise.
Cost-push inflation:: Inflation occurs when the cost of production for goods and services increases, causing businesses to pass on higher prices to consumers.
Stagflation:: A situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high.
Hyperinflation:: An extremely rapid or out-of-control inflation, often leading to the collapse of a country's currency.
Disinflation:: A decrease in the inflation rate, meaning that prices are still rising but at a slower pace.

Practice Question #2

What is the primary difference between disinflation and deflation?

A) Disinflation is a decrease in the rate of inflation, while deflation is an increase in the rate of inflation.

B) Disinflation is a decrease in the rate of inflation, while deflation is a decrease in the general price level of goods and services.

C) Disinflation is an increase in the rate of inflation, while deflation is a decrease in the general price level of goods and services.

D) Disinflation is an increase in the rate of inflation, while deflation is an increase in the general price level of goods and services.

Select an option above to see an explanation here.

A) This option reverses the definitions of disinflation and deflation. B) Disinflation is a decrease in the rate of inflation, meaning that prices are still rising but at a slower pace. Deflation is a decrease in the general price level of goods and services. C) This option reverses the definitions of disinflation and deflation. D) This option is incorrect for both disinflation and deflation.

Historical Example

In the 1970s, many countries experienced stagflation, a combination of high inflation, high unemployment, and slow economic growth.

Practice Question #3

Which of the following is NOT a potential consequence of hyperinflation?

A) A decrease in consumer spending

B) A collapse of a country's currency

C) An increase in the money supply

D) A decrease in the value of money

Select an option above to see an explanation here.

A) A decrease in consumer spending can result from hyperinflation, as people may hesitate to spend money when prices rapidly increase. B) A collapse of a country's currency can result from hyperinflation, as the value of money decreases rapidly. C) An increase in the money supply can cause hyperinflation, not a consequence. D) A decrease in the value of money is a direct consequence of hyperinflation, as prices rise rapidly.

Real-World Example

In recent years, Japan has struggled with deflation, which has led to decreased consumer spending and slow economic growth. To combat this, the Bank of Japan has implemented various monetary policy measures, such as lowering interest rates and increasing the money supply, to stimulate inflation and economic growth.