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Macroeconomics Notes
Macroeconomics Notes
A. Inflation
Inflation is a sustained (not a one-time) increase in the general price level (not of
some individual prices of goods or sevices). The General Price-level is measured by
the IGD or the CPI. Since the value of money (or the purchasing power of money) is
inversely related to the price level, inflation can also be defined as a sustained fall
in the value of money.
1. Mild inflation
Mild inflation also known as creeping inflation is as the name suggests a very slow
rise in prices of goods and services. If the prices increase by 3% or less annually,
then such inflation is creeping inflation. Such inflation is not harmful to the economy
(given that there is no fixed income group in the economy). In fact, as per the
Federal Reserve, a 2% inflation rate is desirable. It is necessary for the economic
growth of a country.
2. Walking Inflation
In this case, the inflation rate falls between 3% to 10%. Such inflation can be harmful
to the economy. Consumers start stocking goods fearing the prices will rise further.
This causes excess demand and the prices increase further.
3. Galloping Inflation
When creeping and walking inflation are left unchecked, the rate of inflation will
rise above 10%. This is galloping inflation. The currency of the country will lose value
in the global economy. The salaries and income of common people will not be able
to keep up with the ever-increasing prices of commodities. This will lead to the
general instability of the economy and the country as a whole.
4. Hyperinflation
B. Stagflation
C. Okun's Law
Okun's Law (first observed by Arthur Okun, a Yale economist who served on
President Kennedy's council of economic advisors) is an empirically observed
relationship between unemployment and losses in a country's production. It
predicts that a 1% increase in unemployment will usually be associated with a 2%
drop in gross domestic product (GDP). Although Okun's law is not derived from any
theoretical prediction, observational data indicates that Okun's law often holds true.