Editing Macroeconomics (section)

===Inflation and deflation===
[[File:M2 and Inflation USA.svg|thumb|right|Changes in the ten-year moving averages of price level and growth in money supply (using the measure of M2, the supply of hard currency and money held in most types of bank accounts) in the US from 1880 to 2016. Over the long run, the two series show a clear positive correlation.]]
A general price increase across the entire economy is called [[inflation]]. When prices decrease, there is [[deflation]]. Economists measure these changes in prices with [[price index]]es. Inflation will increase when an economy becomes overheated and grows too quickly. Similarly, a declining economy can lead to decreasing inflation and even in some cases deflation.

[[Central bank]]ers conducting [[monetary policy]] usually have as a main priority to avoid too high inflation, typically by adjusting interest rates. High inflation as well as deflation can lead to increased uncertainty and other negative consequences, in particular when the inflation (or deflation) is unexpected. Consequently, most central banks aim for a positive, but stable and not very high inflation level.<ref name=Blanchard/>

Changes in the inflation level may be the result of several factors. Too much [[aggregate demand]] in the economy will cause an [[Overheating (economics)|overheating]], raising inflation rates via the [[Phillips curve]] because of a tight labor market leading to large wage increases which will be [[Pass-through (economics)|transmitted]] to increases in the price of the products of employers. Too little aggregate demand will have the opposite effect of creating more unemployment and lower wages, thereby decreasing inflation. Aggregate [[supply shock]]s will also affect inflation, e.g. the [[1970s energy crisis|oil crises of the 1970s]] and the [[2021–2023 global energy crisis]]. Changes in inflation may also impact the formation of [[inflation expectations]], creating a self-fulfilling inflationary or deflationary spiral.<ref name=Blanchard/>

The [[monetarist]] [[quantity theory of money]] holds that changes in the price level are directly caused by changes in the [[money supply]].{{sfn|Mankiw|2022|p=98}} Whereas there is empirical evidence that there is a long-run positive correlation between the growth rate of the money stock and the rate of inflation, the quantity theory has proved unreliable in the short- and medium-run time horizon relevant to monetary policy and is abandoned as a practical guideline by most central banks today.<ref name="Graff">{{cite journal |last1=Graff |first1=Michael |title=The quantity theory of money in historical perspective |url=https://www.research-collection.ethz.ch/handle/20.500.11850/124095 |journal=Kof Working Papers |publisher=KOF Swiss Economic Institute, ETH Zurich |access-date=3 September 2023 |date=April 2008|volume=196 |doi=10.3929/ethz-a-005582276 }}</ref>