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  • Print publication year: 2019
  • Online publication date: January 2019

Chapter 3 - Inflation, Relative Prices, and Expectations


Chapter 2 focused on output, income, and expenditure in real terms, that is, in the prices and costs of a particular base year. But nominal values (i.e., current money values), which reflect both aggregate inflation and changes in relative prices, are equally important.1 Price and cost changes add several additional dimensions to macroeconomic analysis. Not only can we account for output, income, and expenditure in easy-to-measure nominal terms, but we also get the tools to assess inflationary or deflationary conditions and the influences of relative prices on the allocation of resources, the international competitiveness of a country, and the distribution of income.

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