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Macroeconomic Essay

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  • October 2012
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The purpose of this essay is to fully understand macroeconomic by analysing these questions. All these issues are related to the concept of inflation. First of all, it will give a definition of inflation and list the measures of inflation. Then, it provides what is the difference between cost-push inflation and demand-pull inflation. Next, an explanation of conflict between the objectives of full employment and price stability is represented. Finally, it is to explain that stagflation pose a problem for demand management policies.

Inflation is an increase in the general (average) price level of goods and services in an economy. Inflation has positive and negative effects. It is noted that inflation is not a growth in price of any specific goods and services in the economic over a period of time. When the price level increases, fewer products are purchased. Inflation can affect the purchasing power of money, the real interest rate and investment and business decisions making Deflation is the opposite of inflation. Neither inflation nor deflation does mean all prices of all goods and services in the economy rise/decrease during a given period (Layton, Robinson &Tucker, 2012, p308).

The consumer price index (CPI), an index that measures the monthly changes in the average price of consumer goods and services, is the most common measure of inflation, although it is not a perfect measure of inflation (Layton et al., 2012, p310). The formula can be expressed: CPI = cost of the market basket of products at current year prices cost of the same market basket of products at based year prices ×100 The annual rate of inflation (inflation rate of a price index) is the percentage change in the CPI from one year to another. The formula is: Annual rate of inflation = CPI in the given year – CPI in the previous yearCPI the in previous year ×100 Measuring inflation in an economy requires objective means of differentiating changes in normal prices on a common set of...

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