Standard 20 - Federal government budgetary policy and the Federal Reserve System's monetary policy influence the overall levels of employment, output, and prices. Refer back to discussion of markets and the role of money in reducing transaction costs. Give examples of types of money. Inflation is a general increase in the level of prices throughout the economy. The most widely recognized measure of inflation is the Consumer Price Index.
Unanticipated inflation alters the incentives normally created by price signals in the economy.
The incentive to save diminishes as inflation erodes the value of savings accounts and fixed incomes. The incentive to spend and to accumulate debt increases as consumers act in anticipation of rising prices and wages. Inflation creates additional uncertainty. Predicting the future is more risky and mistakes are more costly. Interest rates rise to cover the expected inflation rate.