Final answer:
Inflation is the general increase in prices, measured by indices like CPI and GDP deflator. Understanding the causes and impacts of inflation is crucial for assessing economic stability and policy-making.
Explanation:
Inflation is the general increase in prices of goods and services over time. It is measured using indices like the Consumer Price Index (CPI) and the Gross Domestic Product (GDP) deflator. Some causes of inflation include excessive money supply, high demand, and production cost increases. Inflation can impact the economy by reducing purchasing power, leading to uncertainty, and affecting investments and savings.
The Consumer Price Index (CPI) measures the average change over time in prices paid by urban consumers for a market basket of consumer goods and services, while the GDP deflator measures the level of prices of all new, domestically produced, final goods and services in an economy. The main differences lie in the items included, base years used, and calculation methodologies.
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