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Macroeconomics Assignment: Inflation

Inflation is one of the important variables in the macroeconomic analysis of an economy. Macroeconomics deals with variables that affect the whole economy, rather that the individual sectors in an economy. Domestic prices are determined by demand and supply in an economy. High inflation affects the spending power of the consumer, and value of the domestic currency. For the purpose of this assignment, the important variable for discussion is inflation.

The discussion starts by defining inflation. In macroeconomics, inflation is the sustained increase in the general prices of goods is an economy. Because the price cannot be used as a measure of inflation, Consumer Price Index is used. CPI measures the average variation of the prices paid by consumers for a basket of basic goods in the retail market. First we consider the “general prices.” General Price level is the average price of a certain of goods in an economy. As a measure of inflation, the general price is the price of basic goods or necessities commonly referred as the food basket.

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