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Chapter 6

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University of Ottawa

ECO1102Introduction to MacroeconomicsChapter 6Chapter 6 Measuring the Cost of LivingInflation refers to a situation in which the economys overall price level is risingThe inflation rate is the percentage change in the price level from a previous periodThe Consumer Price Index CPI is a common measure of the price levelCanadian inflation has beenoSimilar to that in other industriesoLower than that in developing countriesStagflation A special case of inflation where an increase in prices is always accompanied by a decrease in GDPInflation redistributes as well as reduces purchasing powerCauses of InflationMoney supply Growth in the money supply currency and bank deposits exceeds the growth of goods and servicesExchange rates Value of one currency in terms of another currency changes may affect the cost of purchasing goods and services from other countriesCostpush inflation Increases in production costs wages which results in higher pricesDemandpull inflation The demand for goods and services grows faster than their productionIt is easy to decrease the quantity of money but it is not easy to increase the production of goods and servicesWhen Factors of production labour and wages rise the prices increaseWhy bother with inflationRepercussions on the purchasing power of moneyopurchasing power or value of money declines if prices increase and cash flows including weekly wages are not fully responsive do not grow at the same rate as pricesofuture dollars are less valuable than today or present dollars
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