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what is InflationInflation is a continuing rise in the general level of prices.

Inflation results in our money having less purchasing power – our money is worth less.

Deflation is the opposite, a decrease in the level of prices.

Inflation results in:

  • higher interest rates (people want to see a gap between the inflation rate and their saving rate or it is not worth saving money)
  • increased spending
  • reduced saving
  • decline in international competitiveness
  • bracket creep (income falling into higher tax rates) as wages rise
  • reduced standard of living

Aggregate demand and supply diagrams can be used to explain the cause of inflation – demand pull and cost push.

To learn more about this, as a starting point, take this Macroeconomics – Inflation Tutorial Course Macroeconomics Inflation Tutorial Course

Back to  Macroeconomics Questions and Answers