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inflation

The rate at which prices increase. In a healthy economy, prices usually increase about 2% per year. Deflation is when prices decline and that’s bad because it causes people and businesses to hold off making purchases: why buy a new car today if it will be cheaper in the future? A little bit of inflation is good for the economy. But too much (hyperinflation) can be devastating because it makes one’s savings virtually worthless. Central banks, like the US Federal Reserve, try to maintain healthy rates of inflation by using their power over interest rates to either encourage economic growth by lowering interest rates (because businesses are encouraged to take loans to build factories, for example) or to keep growth from overheating by raising interest rates (because growth that is too low can lead to deflation while growth that is too high can lead to inflation).

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