Answer:
Explanation:
Diagram A below shows the level of prices in the Consumer Price Index, or CPI, stretching back to 1913. In this diagram, the base years—when the CPI is defined as 100—are set for the average level of prices that existed from 1982 to 1984. Diagram B below shows the annual percentage changes in the CPI over time, which is the inflation rate.
Graph A shows the trends in the US price level from the year 1916 to 2014. In 1916, the graph starts out close to $10, rises to around $20 in 1920, stays around $16 or $17 until 1931, then jumps to around $15. It gradually increases, with periodic dips, until 2014, when it is around $236. Graph B shows the trends in US inflation rates from the year 1916 to 2014. In 1916, the graph starts out at 7.7%, jumps to close to 18% in 1917, drops drastically to close to –11% in 1921, then goes up and down periodically until settling to around 1.5% in 2014.
Graph A shows the trends in the US price level from the year 1916 to 2014. In 1916, the graph starts out close to 10, rises to around10,risestoaround10, comma, r, i, s, e, s, t, o, a, r, o, u, n, d20 in 1920, stays around 16 or16or16, o, r17 until 1931, then jumps to around 15. It gradually increases, with periodic dips, until 2014, when it is around15.Itgraduallyincreases,withperiodicdips,until2014,whenitisaround15, point. Graph B shows the trends in US inflation rates from the year 1916 to 2014. In 1916, the graph starts out at 7.7%, jumps to close to 18% in 1917, drops drastically to close to –11% in 1921, then goes up and down periodically until settling to around 1.5% in 2014.
Let's take a closer look at diagram B. The first two waves of inflation are easy to characterize in historical terms: they are right after World War I and World War II. However, there are also two periods of severe negative inflation—called deflation—in the early decades of the 20th century. One of these periods followed the deep recession of 1920–21 and the other was during the Great Depression of the 1930s.
Since inflation is a time when the buying power of money in terms of goods and services is reduced, deflation is a time when the buying power of money in terms of goods and services increases. For the period from 1900 to about 1960, the major inflations and deflations nearly balanced each other out, so average annual rate of inflation over these years was only about 1% per year. A third wave of more severe inflation arrived in the 1970s and departed in the early 1980s.
Times of recession or depression often seem to be times when the inflation rate is lower, as in the recession of 1920–1921, the Great Depression, the recession of 1980–1982, and the Great Recession in 2008–2009. There were a few months in 2009 that were deflationary, but not at an annual rate.
Recessions are typically accompanied by higher levels of unemployment, and the total demand for goods falls, pulling the price level down. Conversely, the rate of inflation often—but not always—seems to start moving up when the economy is growing very strongly, for example immediately after wartime.
