Monetary Policy in the United States, Part 3
Question 1: Describe creeping inflation, galloping inflation, hyperinflation, and deflation.
Answer 1: Some fluctuation in prices and in the purchasing power of money in an economy is typical. Even in the American economy, considered one of the most stable in the world, there is between one and three percent inflation annually. When inflation increases gradually over a long period of time, economists refer to it as creeping inflation. If the inflation rate rises drastically, on the other hand, economists refer to it as galloping inflation. Hyperinflation is defined by economists as inflation of 50 percent or more.
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Question 2: Describe demand-pull inflation.
Answer 2: A number of economic factors can cause inflation. Sometimes, overall demand rises faster than production, which causes prices to rise and money to lose purchasing power. Economists describe such a scenario as demand-pull inflation. An economy is vulnerable to demand-pull inflation when positive events increase consumer confidence. In such an economy, typically a brief lag occurs while producers work to meet the rise in demand. During the lag period, prices rise. Furthermore, overabundance of money in the economy can also cause demand-pull inflation. For instance, if the Federal Reserve puts too much money in the American economy, consumption will go up before production can increase to meet it.
Question 3: Describe cost-push inflation and wage-price spirals.
Answer 3: Drastic rises in production costs result in increasing prices in a scenario called cost-push inflation. Sudden increases in energy cost or raw materials cost often causes cost-push inflation. Because of the United States’ dependence upon petroleum, for instance, there is always a danger of cost-push inflation when oil prices rise. Increases in wages present another potential cause for cost-push inflation. If the increases in wages raise production costs, the resulting rise in prices can lead to demands for even higher wages. The resulting wage-price spiral can be very difficult to escape.
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