Inflation & Deflation. Reference 13.1 and 13.2. Aggregate=all together. Aggregate demand and aggregate supply considers the entire quantity of goods and services in an economy. The equilibrium price in aggregate supply and demand curves is called the price level. S1. D1. Price Level.
Reference 13.1 and 13.2
What is it?
an increase in the price level
a decrease in price level
How is it determined?
by comparing the CPI in different years and noting the change
CPI is higher=inflation
CPI is lower=deflation
CPI= Consumer Price Index
Inflation rate = (CPI later year – CPI earlier year) ÷ CPI earlier year
Inflation can be caused by an increase in aggregate demand
Inflation can be caused by a decrease in aggregate supply
Deflation can be caused by a decrease in aggregate demand
Deflation can be caused by an increase in aggregate supply
What does velocity mean?
velocity=the average number of times per year
a dollar is spent to buy final goods
M x V = P x Q
M = money supply
V = velocity
P = price level
Q = quantity of output
% change M = % change P
More working people
(increase in aggregate demand)
What’s up with that?