Recap

If only Tiffany had taken a course in macroeconomics, she would have known better than to ask her mom such as silly question. Actually, the relationship between a rising level of prices (inflation) and the money supply is not that obvious. I believe it becomes more obvious when one finds themselves in an inflationary environment and their money loses its purchasing power. In the United States, we've never had to experience such a scenario, therefore, we have a harder time of relating.

While inflation or deflation are neither good, the central bank targets a low rate of inflation. A low rate of inflation ensures that the economy continues to grow and also avoid the perils of deflation that could result in a downward wage-price spiral into recession.

Looking Ahead

In the coming week, we will review the economic model of aggregate demand and aggregate supply (AD/AS). We will look at what affects both the AD and AS curves, as well as how to differentiate between short-run and long-run equilibrium. In addition, the concept of GDP gaps in identifying the three different states of an economy will also be reviewed.

Aggregate demand & aggregate supply is one of the most important concepts in macroeconomics. Make sure that you watch every single video provided this week, preferably in the order in which I have listed them. They will undoubtedly help you in understanding the material for this chapter.