Measurement of inflation in the macroeconomy

Abstract

Inflation is determined for the first time by the function of real Gross Domestic Product (GDP), the amount of money in circulation, foreign currency holdings, and the velocity of money, which are regulated by the Central Bank with an interest rate depending on consumer demand. Increasing the velocity of money through higher interest rates reduces the supply of cash and reduces inflation. Unemployment affects inflation only through the value of real GDP. An increase in real GDP reduces inflation, while an increase in unemployment reduces real GDP and increases inflation.