Chapter 12: Problem 1

Define: a. inflation b. demand-side inflation c. supply-side inflation d. velocity e. simple quantity theory of money f. hedge g. deflation

Short Answer

Expert verified

Inflation is the general increase in prices, demand-side inflation caused by demand exceeding supply, and supply-side inflation due to the increase in production costs. Velocity is the rate at which money circulates in the economy. The simple quantity theory of money suggests that the price level is directly proportional to the money supply. A hedge is an investment to offset potential losses or gains, and deflation refers to a decrease in the general price level of goods and services.

Step by step solution

Definition of Inflation

Inflation is an economic term that refers to a general increase in prices and fall in the purchasing value of money. It is usually measured as an annual percentage increase. The Consumer Price Index (CPI) is often used as a measure of inflation.

Definition of Demand-Side Inflation

Demand-side inflation is a type of inflation that occurs when demand for goods and services exceeds their supply. This can happen due to increased consumer spending, government spending, or investment from businesses.

Definition of Supply-Side Inflation

Supply-side inflation, on the other hand, is a type of inflation that occurs when costs to produce goods and services increase. This rise in production costs often leads suppliers to increase prices in order to maintain their profit margins.

Definition of Velocity

In economic terms, velocity refers to the rate at which money changes hands in an economy. It is calculated by dividing the nominal GDP by the country's total money supply.

Definition of Simple Quantity Theory of Money

The Simple Quantity Theory of Money states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply.

Definition of Hedge

In finance, a hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. In simple language, a hedge is used to reduce any substantial losses or gains suffered by an individual or an organization.

Definition of Deflation

Deflation is the opposite of inflation. It refers to a decrease in the general price level of goods and services. It is usually associated with a contraction in the supply of money and credit in the economy.

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