Cambridge International as and a level Economics Ebook

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Cambridge International AS Level Economics
Inflation
Infl ation
does not mean that every price is rising or 
that they are rising at the same rate. What it does mean 
is that, on average, prices are rising at a particular rate. 
For instance, an infl ation rate of 6% would mean that, 
on average, prices are 6% higher than in the previous 
period. When the price level increases, the value of money 
falls and its purchasing power declines. Each unit of the 
currency, e.g. each dollar note, will buy less.
Inflation: 
a sustained increase in an economy’s price level.
KEY TERM
Degrees of inflation
A low and stable rate, of for instance 2%, is generally 
regarded not to be a problem. Indeed, seeing a low 
and steady rise in prices may encourage firms to 
produce more. Such a rate of inf lation is sometimes 
known as 
creeping inflation
. In contrast to a low 
rate of inf lation is 
hyperinflation
. This is often 
taken to be an inf lation rate that exceeds 50% but it 
can go much higher. At the start of the twenty-first 
century, Zimbabwe experienced an inf lation rate so 
high that economists had difficulty measuring it. It 
has been estimated that it reached in 2008 anywhere 
between 200 million per cent and 89 sextrillion per 
cent. Hyperinf lation occurs when inf lation gets out 
of control and sometimes results in people resorting 
to barter. In such cases the currency usually has to be 
replaced by a new currency unit.
Creeping inflation: 
a low rate of inflation.
Hyperinflation: 
an exceptionally high rate of inflation, 
which may result in people losing confidence in the currency.
KEY TERMS