Macroeconomics

Some Important Definitions:

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.

Different types of inflation:

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

Hyperinflation occurs when the inflation is completely out of control. No measures

taken by the monetary authorities can control the prices. The rate of inflation can be
50% on a monthly basis. This is the last stage of inflation. A real-world example is
that of Venezuela, where the IMF has predicted prices rose 13,000% in 2018.

B. Stagflation

Stagflation is a rare phenomenon where there is still an increase in prices of

commodities, but the economic growth has become stagnant. It causes economic
instability due to the rise in unemployment, severe inflation, and lack of economic
growth.

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.