Texas A&M University (TAMU) ECON410 Macroeconomic Theory Practice Exam 1

Inflation is primarily characterized by a rise in general price levels across an economy over a period of time. When inflation occurs, it indicates that the purchasing power of currency is decreasing, as more money is required to purchase the same amount of goods and services compared to a previous time. This phenomenon reflects changes in the overall price level, which is commonly measured using indices such as the Consumer Price Index (CPI) or the Producer Price Index (PPI).

The concept of inflation highlights a broad economic trend rather than specific, isolated incidents. It does not necessarily correlate with changes in employment or GDP, which can fluctuate for various reasons independent of price level changes. For instance, while rising consumer spending may contribute to inflation, it is not a defining characteristic of inflation itself. Inflation fundamentally revolves around the general increase in prices rather than specific economic activities or conditions.