Download Inflation - socialsciences dadeschools net

Grade 10 Lesson # 7
What causes inflation?
How does inflation affect the value of money?
SS.912.FL.3.2 Examine the ideas that inflation reduces the value
of money, including savings, that the real interest rate expresses
the rate of return on savings, taking into account the effect of
inflation and that the real interest rate is calculated as the
nominal interest rate minus the rate of inflation.
Ben Shalom Bernanke, 14th Chairman of the Federal Reserve Bank (2006-2014)
Correlated Literacy Standards:
LAFS.910.SL.1.1: Initiate and participate
effectively in a range of collaborative
discussions (one-on-one, in groups, and
teacher-led) with diverse partners on grades 9–
10 topics, texts, and issues, building on others’
ideas and expressing their own clearly and
persuasively.
LAFS.910.RH.1.3: Analyze in detail a series of
events described in a text; determine whether
earlier events caused later ones or simply
preceded them.
SS.912.FL.3.2 Examine the ideas that inflation reduces the value of money, including savings, that the
real interest rate expresses the rate of return on savings, taking into account the effect of inflation and
that the real interest rate is calculated as the nominal interest rate minus the rate of inflation.
Inflation and the Value of Money
Lesson Number:
7
Correlated Florida Standards (See Full Text on Cover Page)
 LAFS.910.SL.1.1
 LAFS.910.RH.1.3
Essential Question
 How does inflation affect the value of money?
Learning Goals/Objectives
 Understand how inflation affects the value of money
 Recognize reasons that the Federal Reserve raises or lowers interest rates
Overview
 In this lesson students will explore how inflation affects the value of money. The lesson will help
students understand why the Federal Reserve raises or lowers interest rates.
Materials
 Money and Inflation PowerPoint (Included in lesson file)
 Causes of Inflation Slide Show: http://www.econedlink.org/interactives/EconEdLink-interactive-toolplayer.php?filename=presentation.swf&lid=615
 Handout #1 Inflation Part I (Included in Lesson)
 Handout #1 Inflation Part II (Included in Lesson)
 Too Much Money DVD: http://www.izzit.org/products/detail.php?video=too_much_money
Vocabulary
Money Inflation, Government Spending, Discount Rate, Federal Funds Rate, Federal Reserve System, Open
Market Operations, Monetary Policy, Interest Rate
Time
 50 minutes
Activity Sequence
INTRODUCTION/HOOK
 In this lesson you will look at different types of inflation and terms associated with this economic
concept. You may have heard relatives talk about the good old days when a dollar would buy
something. What happened to that dollar? Why won't it buy as much as it did last month or last year?
What happened is inflation. In this lesson you will examine various causes and theories of inflation as
well as who is responsible for tracking it. [5 minutes]
ACTIVITY
1.
Use the Money and Inflation PowerPoint presentation to teach about the different types of inflation and
how each affects your ability to buy goods and services. [15 minutes]
2. Distribute, review and discuss “Money and Inflation” handout. ( 5 minutes)
3. Use the Causes of Inflation Slide Show presentation as your guide for making your way through this
lesson on the various causes of inflation. Discuss with students these highlighted vocabulary words:
Inflation, Purchasing Power, Consumer Price Index, Market Basket, Types of Inflations (Quantity
Theory, Demand Pull Theory, and Cost Push Theory) [10 minutes]
4. Distribute Handout #1 Inflation. Have students answer the questions using Handout #2 – Inflation Part
II. [10 minutes]
CLOSURE
Discuss answers from Inflation handout and review essential questions. Explain to students that inflation has
remained in check for much of the past three decades. As a result, prices of goods and services have remained
relatively steady. However, we must be on the lookout for factors that can lead to periods of high inflation. Prices
of goods and services will rise. The rise may be caused by demand exceeding supply, or because the cost of
making goods and services rises and that cost gets passed on to the consumer, or because there is too much
money in the economy. Whatever the reason, or combination of reasons, we can expect some inflation in our
economy. Ask students what they thought was the most interest detail about this lesson. How can they apply this
lesson to their personal experience?[5 minutes]
OPTIONAL EXTENSION SUGGESTION/HOME LEARNING
 Write an essay, comparing and contrasting the causes of inflation.
 View the DVD Too Much Money [16:00]
BIBLIOGRAPHY
Causes of Inflation Slide Show http://www.econedlink.org/interactives/EconEdLink-interactive-toolplayer.php?filename=presentation.swf&lid=615
CPI Inflation Calculator http://www.bls.gov/data/inflation_calculator.htm/
Inflation
http://www.socialstudieshelp.com/Eco_Inflation.htm
Money and Inflation
http://www.fte.org/teacher-resources/lesson-plans/efllessons/lesson-9-money-and-inflation/
Too Much Money DVD
http://www.izzit.org/products/detail.php?video=too_much_money
Understanding Inflation: Changes in Purchasing Power
https://www.youtube.com/watch?v=dYtWJI4_c7o&feature=youtu.be
What causes inflation? http://www.econedlink.org/lesson/615
Money and Inflation
Key Concepts
1.
Review:
 Voluntary trade creates wealth.
 Institutions that facilitate trade help to increase wealth and raise standards of living.
2.
Money enhances voluntary trade by reducing transaction costs.
 Money is anything generally accepted in exchange for goods and services.
 Money performs three functions in market economies:
 Money is a store of value
 Money is a standard of value
 Money is a medium of exchange.
3.
The interest rate is the opportunity cost of holding money, because instead of holding money, people
could hold interest-earning assets (such as Certificates of Deposit or bonds) instead.
4.
Interest rates are determined by the interaction of lenders who supply funds, and borrowers, who
demand funds.
 Savers supply funds to be loaned and are paid interest for waiting to consume at a later date.
 Demanders of these funds are the borrowers, who pay interest in order to have the right to spend
now instead of waiting for future income. This spending might be on consumption or on
investment goods (such as plant and equipment).
 Interest rates vary with the type of market. Rates change within a market in response to changes
in supply and demand for loanable funds.
5.
The money supply is a measure of the total amount of money in an economy.
 The money supply changes through activities of the commercial banking system.
 The Federal Reserve System is charged with, among other things, managing the money supply
of the United States. It does this by managing the stock of currency in circulation and the amount
of reserves in the banking system.
 The Federal Reserve uses open market operations to alter the amount of currency and bank
reserves, generally signaling its intentions to do so through changes in its target value for the
Federal Funds rate and changes in the Discount rate.
 The Federal Fund rate is the rate of interest at which U.S. banks lend to one another their
excess reserves held on deposit by Federal Reserve banks.
 The Discount rate is the rate at which member banks may borrow short term funds directly
from a Federal Reserve Bank.
 Other policy vehicles available to the Fed include: reserve requirements, margin requirements on
stock loans, credit controls on lending quality, and changes in eligible “collateral” for direct
loans to member banks and other commercial institutions (e.g., investment banks).
6.
Inflation is a general increase in the level of prices throughout the economy.
 The most commonly used measure of inflation is the Consumer Price Index, (or CPI). The GDP
Deflator is another important measure of inflation. Changes in these price indices indicate
changes in the purchasing power of the U.S. dollar.



Unanticipated inflation alters the normal signals buyers and sellers receive from prices, changing
their behavior in markets.
 Inflation encourages more debt and faster spending as buyers and sellers try to avoid rising
prices.
 Inflation creates uncertainty and makes future planning more difficult.
Unanticipated inflation erodes the purchasing power of nominal assets, including money, bonds, and
savings accounts. Individuals with fixed incomes also lose.
Very rapid inflation (a/k/a hyperinflation) causes markets of all types to break down, for two reasons.
 The extremely high cost of using money during hyperinflations forces people to resort to
barter, which is an inefficient means of transacting.
 A high average rate of inflation is always accompanied by much uncertainty about the future
inflation rate, which makes many contracts more risky. Greater levels of risk increase the
value of the “option to wait,” which delays many consumption and investment decisions, and
thereby slows economic growth.
7. Inflation is a monetary phenomenon, and almost always occurs because increases in the stock of money
exceed growth in output of goods and services.
 Rapid increases in the money supply can be the result of poor management by the central bank or by
a decision to print money to support government spending.
 A frequent problem in developing nations is that governments without stable or consistent tax
collections often resort to printing money to finance government spending.
 Inflation increases pressure on government to impose price controls which tends to make conditions
worse instead of better.
 Intended to halt rising prices, price controls instead disguise inflation and disrupt the
allocation of goods and services.
Ideas To Take Away From This Lesson
 Money is an innovation that significantly improved the operation of markets.
 Banks facilitate the operation of markets by expanding the quantity of money in circulation.
 Inflation is a consequence of the money supply growing faster than production.
 The Fed manages price and interest rate levels by changing the money supply.
 Inflation creates disruptions and losses in the overall economy as buyers and sellers act to avoid its
effects.
Handout #1 Inflation
Name:
Date:
Period:
Directions: Complete the questions below using the information from this Web site:
http://www.socialstudieshelp.com/Eco_Inflation.htm (Handout #2)
1. What is inflation?
2. To measure the price level, economists select a variety of goods and construct a price
index such as the _________________________________________________ (CPI).
3. Describe two reasons for the causes of inflation.
4. What types of people are most negatively affected by inflation and the depreciation of the
dollar?
5. _________ are generally hurt more than _________ during long inflationary periods
which mean that loans made earlier are repaid later in inflated dollars.
Handout #1 Inflation Part II
Inflation
Inflation is a rise in the general price level and is reported in rates of change. Essentially what this means is
that the value of your money is going down and it takes more money to buy things. Therefore, a 4% inflation
rate means that the price level for that given year has risen 4% from a certain measuring year (currently 1982
is used). The inflation rate is determined by finding the difference between price levels for the current year
and previous given year. The answer is then divided by the given year and then multiplied by 100. To
measure the price level, economists select a variety of goods and construct a price index such as the
consumer price index (CPI). By using the CPI, which measures the price changes, the inflation rate can be
calculated. This is done by dividing the CPI by the beginning price level and then multiplying the result by
100.
Causes of Inflation
There are several reasons as to why an economy can experience inflation. One explanation is the demandpull theory, which states that all sectors in the economy try to buy more than the economy can produce.
Shortages are then created and merchants lose business. To compensate, some merchants raise their prices.
Others don't offer discounts or sales. In the end, the price level rises.
A second explanation involves the deficit of the federal government. If the Federal Reserve System expands
the money supply to keep the interest rate down, the federal deficit can contribute to inflation. If the debt is
not monetized, some borrowers will be crowded out if interest rates rise. This results in the federal deficit
having more of an impact on output and employment than on the price level.
A third reason involves the cost-push theory which states that labor groups cause inflation. If a strong union
wins a large wage contract, it forces producers to raise their prices in order to compensate for the increase in
salaries they have to pay. The fourth explanation is the wage-price spiral which states that no single group is
to blame for inflation. Higher prices force workers to ask for higher wages. If they get their way, then
producers try to recover with higher prices. Basically, if either side tries to increase its position with a larger
price hike, the rate of inflation continues to rise.
Finally, another reason for inflation is excessive monetary growth. When any extra money is created, it will
increase some group's buying power. When this money is spent, it will cause a demand-pull effect that drives
up prices. For inflation to continue, the money supply must grow faster than the real GDP.
Effects of Inflation
The most immediate effects of inflation are the decreased purchasing power of the dollar and its
depreciation. Depreciation is especially hard on retired people with fixed incomes because their money buys
a little less each month. Those not on fixed incomes are more able to cope because they can simply increase
their fees. A second destabilizing effect is that inflation can cause consumers and investors to changer their
speeding habits. When inflation occurs, people tend to spend less meaning that factories have to lay off
workers because of a decline in orders. A third destabilizing effect of inflation is that some people choose to
speculate heavily in an attempt to take advantage of the higher price level. Because some of the purchases
are high-risk investments, spending is diverted from the normal channels and some structural unemployment
may take place. Finally, inflation alters the distribution of income. Lenders are generally hurt more than
borrowers during long inflationary periods which means that loans made earlier are repaid later in inflated
dollars. Source: http://www.socialstudieshelp.com/Eco_Inflation.htm