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Inflation and Government Economic Policies

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Inflation and Government Economic Policies
Inflation and Government Economic Policies
ECO201 Macroeconomics
Argosy University Online

Inflation is described as the process by which prices are continuously rising or the value of money continuously decreases (Consumer Price Index Frequently Asked Questions, 2013). As the definition explains, this is not something that would be desirable for the government or its citizens. For example, Germany during the 1920’s experienced a period of hyperinflation. Germans literally had to carry wheel barrels of money to buy groceries. The price of a loaf of bread rose from around 200 Marks to over 200,000,000,000 Marks. Inflation is measured in several ways including Consumer Price Index, Producer Price Index, Employment Cost Index, Gross Domestic Product Deflator, and several other methods (Consumer Price Index Frequently Asked Questions, 2013). Inflation can be caused when the demand of goods and services cannot be met. Since demand cannot be fulfilled, manufacturers can increase the price of goods, thus causing inflation. Inflation can also be caused when there is too much money in circulation. Money can lose its value if everyone has too much of it. In order to try to control inflation, the government can regulate fiscal policies. Employees’ wages can play a big role in inflation. If everyone is making a lot of money, then prices can increase. Lower incomes actually help governments avoid inflation. Another method of regulating/manipulating inflation is by controlling aggregate demand, the number of goods and services requested at the given price point. Aggregate demand can be altered by either imposing taxes or decreasing and restricting government spending.

According to BLS.gov, CPI, or Consumer Price Index, is the means by which we measure change in prices urban consumers pay for goods and services in the market basket. This measures what consumers pay on a daily basis for goods and services. Since 2000, CPI has been


References: Consumer Expenditure Survey. Retrieved August 20, 2014 from http://www.bls.gov/cex/ Consumer Expenditure Survey August 19, 2014 from http://data.bls.gov/pdq/SurveyOutputServlet Consumer Price Index Frequently Asked Questions August 19, 2014 from http://data.bls.gov/pdq/SurveyOutputServlet Producer Price Indexes
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