- published: 03 Aug 2015
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In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.
Inflation's effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation which may discourage investment and savings, and if inflation is rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions), and encouraging investment in non-monetary capital projects.
Milton Friedman (July 31, 1912 – November 16, 2006) was an American economist, statistician, and author who taught at the University of Chicago for more than three decades. He was a recipient of the Nobel Memorial Prize in Economic Sciences, and is known for his research on consumption analysis, monetary history and theory, and the complexity of stabilization policy. As a leader of the Chicago school of economics, he influenced the research agenda of the economics profession. A survey of economists ranked Friedman as the second most popular economist of the twentieth century behind John Maynard Keynes, and The Economist described him as "the most influential economist of the second half of the 20th century…possibly of all of it."
Friedman's challenges to what he later called "naive Keynesian" (as opposed to New Keynesian) theory began with his 1950s reinterpretation of the consumption function, and he became the main advocate opposing activist Keynesian government policies. In the late 1960s he described his own approach (along with all of mainstream economics) as using "Keynesian language and apparatus" yet rejecting its "initial" conclusions. During the 1960s he promoted an alternative macroeconomic policy known as "monetarism". He theorized there existed a "natural" rate of unemployment, and argued that governments could increase employment above this rate (e.g., by increasing aggregate demand) only at the risk of causing inflation to accelerate. He argued that the Phillips curve was not stable and predicted what would come to be known as stagflation. Friedman argued that, given the existence of the Federal Reserve, a constant small expansion of the money supply was the only wise policy.