Question

Please answer all in microsdt word

a.Define, discuss, and provide a real world example of the difference between inflation and deflation.

b.Define, discuss, and provide a real world example of the difference between the 3 types of inflation: creeping inflation, galloping inflation, and hyperinflation.

c.Which is the greater problem: anticipated inflation or unanticipated inflation? Why?

d.Explain the 2 causes of inflation: Demand-Pull Inflation and Supply-Push Inflation.

Answer 1

a. Inflation refers to the rate of growth of prices in an economy over time. Deflation refers to the rate at which price growth is slowing down over time. So if we say that inflation in the US is at 8%, it means that the price index is exhibiting 8% growth currently. Similarly if we say deflation is at 5%, then this will mean that the price growth will slow down by 5% in the economy.

b. Creeping inflation refers to when price growth is at minimal rates and is less than 1% year on year. So if we have price growth at say 0.03% then this will mean we have creeping inflation, that is prices are barely rising. Galloping inflation is when prices are increasing at a fast pace. Say if inflation rises by 5-7% every quarter in the US then this can be called galloping inflation. Hyperinflation refers to inflation rising at extremely high rates. Thus Zimbabwe experienced inflation at 10000% in the 1990s this constituted hyperinflation.

c. Unanticipated inflation is a greater problem than anticipated inflation as it is unexpected and the economy does not have time to prepare for it. This will cause a major jolt to the economy and so unaticipated inflation is worse.

d. Demand pull inflation is the inflation caused by rapid increases in aggregate demand and so this causes the aggregate demand curve to shift rightwards and thus causes prices to rise and we have demand pull inflation. This may have come about through rise in consumption or investment. Supply push inflation occurs when inflation is causes by rapid increases in raw material costs and also wages of workers which causes a fall in aggregate supply and a rapid increase in prices. It is these rises in costs that pushes up prices.