Inflation Essay Example | Topics and Well Written Essays - 1500 words - 4

Inflation - Essay Example The general price level remains low or affordable to the average consumer and stays that way for a long period of time. Thus, stability of prices within an economy is more of a concept than anything else. Moving on to the demand for and supply of goods in the market, there might be a number of fluctuations with regard to the customer’s needs and wants as well as the producer’s. This makes it a little difficult for the overall price values within the market or economy to be comprehended with ease by both parties. And therefore, for this purpose, a general price level or the concept of price stability is adopted in order to reflect the entire impact that the market has had on each of the different and individual units. Thus in order to understand better, price stability is simply a term or concept used to realize the stability or balance that the general price level or market forces have rather than the actually fixed prices on goods and services in the market. Price stability may also be understood as a period in the economy when it does not face inflation or deflation. In order to understand this, the term inflation has been emphasized upon in this paper. Inflation takes place in an economy when the actual aggregate demand within the economy is greater than the required level of aggregate demand for full employment equilibrium. Full employment equilibrium on the other hand is a situation when all the resources within an economy have been utilised in a full and efficient manner, and the demand curve cuts the 45 degree line or supply curve at this point. However, if the demand curve exceeds the point of full employment equilibrium, it leads to an inflationary gap in the economy. This has been better explained with the help of a diagram; Here the C+I (Total consumption plus investment expenditure) is the aggregate demand (point B) which should have been the situation for an ideal level of equilibrium in the