The Effect Of Inflation On The Economy Essay

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• Inflation
One of the most critical aspects of the macro economy is the role inflation plays in determining price levels. Undoubtedly higher inflation will have a negative impact on the economy driving price levels higher then consumer wages are able to keep up with. However, if inflation is too low (below 2%, above 0) it will impede economic growth. The current inflation rate of .2% is a reflection of the anemic economic growth in the economy (U.S. Inflation Calculator). Inflation rates also have a direct impact on the level of investment in the economy. If the price of goods increases and people have to compensate for the increase in price, they usually make use of their savings. In the event when savings are depleted, fund for investment is no longer available. According to the Federal Reserve St. Louis branch the total level of Gross private domestic investment in the economy Q2 2015 is 3.6 trillion USD (FRED 2). Whenever inflation reigns supreme, it is a well-known fact that the value of money goes down. In 1980 the purchasing power of 1 U.S. dollar is the equivalent to 2.89 dollars today (Bureau of labor statistics 1). This is a disturbing number because with the purchasing power of the dollar being relatively low coupled with low inflation rates signifies a weakening dollar. Additionally the CPI is the major indicator the U.S. government uses in determining inflation rates. The federal government also uses the CPI to determine how much more money entitlement programs…

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