Final answer:
Inflation is the general increase in the level of prices in an economy, leading to a decrease in the purchasing power of currency. It is measured by the consumer price index and maintaining low inflation is essential to prevent a decrease in the standard of living.
Step-by-step explanation:
The situation in which the average of all prices of products is rising is called inflation. Inflation refers to a general and ongoing rise in the level of prices in an entire economy, affecting various goods and services. It indicates a decrease in the purchasing power of money, where each unit of currency buys fewer products and services over time. Unlike a change in relative prices, which might see some prices rising while others fall, inflation involves a broad-based increase in the level of all prices.
Inflation is typically measured by the consumer price index and can have significant impacts on the economy and individuals’ standards of living. For instance, if wage increases do not keep pace with inflation, people may experience a decline in their buying power. Thus, maintaining low inflation is often a key economic goal to prevent such a decrease in living standards.