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-Inflation and How Is It MeasuredInflation is a sustained rise in prices across the economy or a sustained fall in the purchasing power of
money. Economists use the consumer price index to measure changes in the prices of goods and
services that consumers commonly purchase. The producer price index is a measure of changes in
wholesale prices. Economists use the consumer price index and the producer price index to calculate
the rate of inflation. To determine CPI, you divide the new value by the original value and multiply by 100.
An inflation rate of under 1 percent per year is negligible. Rates from 1 to 3 percent are moderate. If such
rates continue for years, the result is called creeping inflation. A rapid increase in price levels is called
galloping inflation. If the rate exceeds 50 percent per month, it is called hyperinflation. Deflation, which is a
decrease in general price levels, happens very rarely.
3. Name the two main measures of inflation and how do you determine CPI?
-Causes for InflationThere are two main types of inflation, demand-pull and cost-push. Demand-pull inflation occurs when
demand for products rises faster than production does. Prices rise until producers can catch up with
demand. Demand-pull inflation occurs mainly when the government creates too much money, resulting
in too much money chasing too few goods. Cost-push inflation occurs when prices are pushed up by
rising production costs. It is often the result of supply shocks—sharp increases in the prices of raw
materials or energy. Since wages are part of production costs, a wage-price spiral can lead to cost-push
inflation. In a wage-price spiral, a rise in wages leads to higher production costs, which leads to a rise in
prices, which leads to demands for increased wages.
4. Name the two main types of inflation
-The Impact of InflationInflation has three main effects: decreasing the value of money, increasing interest rates, and decreasing
real return on savings. With inflation, money buys less and less over time. This is a big problem for people
who have a fixed income. However, people who borrow money at a fixed rate of interest gain when
inflation occurs. The money that they pay off their loan with is worth less than the money they borrowed.
During times of inflation, lenders raise interest rates to ensure that they continue to make a profit.
Consumers are less likely to borrow money for purchases when interest rates are high. Because of the
decreasing value of money during times of inflation, people who save their money tend to lose unless they
find investments that substantially beat the rate of inflation. This discourages many people from trying to
save money.
5. What are the three main effects of inflation?
6. If you paid $100 to fill the market
basket in 1984, about how much
would you pay to fill the basket in
2005?
7. Prices doubled from 1971 to 1980.
How long did it take them to
double again after 1980?
8. Has there been any periods of
deflation from 1970 to 2005?
Directions: For each policy pair below, write down which action is taking place:
Fight Inflation or Fight Recession. Read the following information below to help you
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