Macroeconomics - Term Paper Example

This has resulted in a decrease in production, and hence, the world’s Gross Domestic Product (GDP). Other problems such as the crash of the housing market haven’t helped much, and have made the task of lawmakers even more difficult and thought provoking. All of these problems, along with numerous others have been a result of increasing prices of products, services, and in short, the cost of living. This increase in prices of these countless things is known in economic terminology as “inflation”.

Hyper Inflation: Hyper inflation causes severe changes and imbalances in demand and supply. This type of inflation is short-lived because the government intervenes to help money perform its operations. For instance, Russia experienced hyper inflation when it was broken down. During this type of inflation, income levels cannot keep up with the cost of living and the purchasing power freefalls. This leads to economic recession. Moderate or creeping inflation: In this type of inflation, prices rise moderately.

The upward trend in prices is gradual and averages between two to five percent. This type of inflation is good for the economy, as it is considered a sign of demand in the economy. Creeping inflation gives several inter linked benefits to an economy because firms will produce more in response to higher demand, employment would increase and the workers would earn more. Thereby, the increase in the cost of living would be proportional to the increase in income level. However, creeping inflation can turn into hyper inflation, if the price level increase crosses double figures.

Strato Inflation: Inflation rate of this type ranges from 10% to several hundred percent. It is difficult to anticipate and is usually experienced by developing economies due to their economic weakness. Disinflation: Slowing down of the rate of inflation is called disinflation. For example, if the rate of inflation in USA in 2006 was 5% and in 2005 was 7%. Prices increased in both the