Inflation is also one of the few economic concepts that is generally understood and watched by the lay public because when the general level of prices rises, people's wages can buy less and less of the goods and services that they need. Thus inflation can thus also be seen as a devaluation of the purchasing power of money. The inflation rate is an annualized rate that designates the percentage change over time in the general price index of an economy. (in the United States, this general price index is the Consumer Price Index.)
Aggregate demand is an important concept within macroeconomic theory. It designates the total demand within an economy for both services and goods at any given point of time and as assessed at a specific price level. This concept is also designated as the effective demand and can be seen as the total demand for the gross domestic product of an economy if inventory levels are being held at a static level.
When it is graphed, the aggregate demand curve always slopes downwards. This is not because of the fact that as prices fall the demand for a service or good grows. Rather, it is a much more complicated equation based on a convergence of different conditions of distribution of wealth, exchange rates, and interest rates.
Extra Credit Question: Discussion of money as a storage of value and as neutral.
Money in its function of storage of value serves as a sort of proxy for other kinds of wealth. Before the widespread use of currency, land, precious metals and gems, finely crafted goods and art, and livestock were all used to store value. As should be obvious to anyone, money is far more portable than these other forms of wealth.
However, it is also true that money as storage of value is a mechanism of inflation. Money can become disjoint from other types of values and so is more subject to manipulation. According to classical economic theory, money can be considered to be both neutral and a storage of value because the neutrality of money was originally conceived as a mechanism to direct the rate of interest, something that is not tied to inflationary or deflationary cycles. Later conceptions of this idea is that money is neutral in that change in the amount of currency in circulation (the amount, not its value) affects only certain parts of the economy.
This in turn is related to a dichotomous distinction that classical economists make between those aspects of the economy that are affected by actions of the central bank and those that are not and that can thus be conceived of as representing money in its neutral aspect.
