Inflation and Key Economic Concepts
This page introduces fundamental concepts related to inflation and its impact on the economy.
Definition: Inflation is a general increase in the price of goods and services over time.
Vocabulary: Disinflation refers to a falling rate of inflation that remains positive, while deflation is an actual decrease in the average price of goods and services.
The negative effects of deflation on the economy are explained, including:
- Consumers delaying purchases, leading to reduced economic activity
- Decreased investment and productive capacity
- The potential for a deflationary spiral
The page also introduces demand-pull inflation, a key concept in A-level Economics. This occurs when aggregate demand exceeds aggregate supply, often during economic boom cycles.
Example: Demand-pull inflation can be caused by factors such as rapid credit growth, high levels of consumption, and overall increases in aggregate demand.
A diagram illustrates how shifts in aggregate demand (AD) can lead to demand-pull inflation, showing the relationship between price levels and real GDP.
Highlight: Understanding the causes and effects of different types of inflation is crucial for analyzing economic conditions and policy responses.