Download Inflation Notes

• Extended Bellringer
• Create a visual in which you outline the
four types of unemployment
• Define unemployment
• What are the three phases of the business
cycle?
• Between what percentage points is
unemployment “normal”?
• Why is high unemployment dangerous to
our economy?
Seasonal
Laid off for
season,
employment will
resume at a
future time
Not counted in
unemployment
Structural
Unable to find
employment
because skills
don’t match job
market
Cyclical
Laid off because
company is
having economic
issues
Frictional
Choosing to be
unemployed
while searching
for a new job
• Define unemployment
• Employable yet unemployed; actively seeking employment
• What are the three phases of the business cycle?
• Recession, depression, recovery
• Between what percentage points is unemployment
“normal”?
• 4-6%
• Why is high unemployment dangerous to our economy?
• Reduces demand across country which diminishes economic
production which causes more job loss
• Read the article that was published Friday
• Answer the following questions in your notebook
(not being turned in)
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How many jobs have been added in November?
What is the unemployment rate right now?
How do interest rates affect the economy?
What sectors added the most employees? Why?
“Many people without jobs have stopped looking
for one and are no longer counted as unemployed”
What kind of workers are these?
• “higher-priced services such as body waxing and
facials” are normal goods or inferior goods?
Essential Learning: Economic Indicators
• After the Great Depression, economists set out
to find a way to predict if our economy would
significantly downturn ever again
• There are three that you must know:
• Inflation
• Unemployment
• GDP (Gross Domestic Product)
• Inflation: General increase in prices OR general
decrease in purchase power
• Deflation: general decrease in prices or increase in
purchase power
• Not a bad thing if kept within reason. Adam Smith
claimed it was naturally occurring.
• Economists agree that if the rate of inflation stays
between 1-3% (2-4) our economy is doing fine
• Cost of a brand new car 1958: $3,000
• Cost of a brand new car 2013: $20,000
• Average cost of a home 1950: 15,000
• Average cost of a home 2013: $215,000
• Something you own will increase in value over time
because of inflation (ex: homes). This increase in value
evolves with the rate of inflation so you don’t lose
money by owning a home
• Purchasing power: As inflation rises, a dollar is not
worth as much. In other words, If you could buy 5
lollipops for $1 today, then next year you might only
be able to buy 3. Your purchasing power (because of
the value of a dollar) has decreased
• The Bureau of Labor Statistics (BLS) is
responsible for calculating inflation
• They use the Consumer Price Index (CPI)
• Price Index: measurement that shows how the
average price of a group of goods has
changed over time
• There are 8 categories of goods that the BLS monitors:
• Food and Drink
• Housing
• Apparel and upkeep
• Transportation
• Medical Care
• Entertainment
• Education and communication
• Other Goods and services (haircuts, cosmetics, bank fees,
etc…)
• The costs of all the goods within these
categories is monitored by BLS
• They compare the costs of these goods monthto-month and year-to-year to determine the
rate of inflation
• Inflation Rate: percentage rate of change in
price level over time
• CPI for year A minus CPI for year B divided by the CPI for year
B and multiplied by 100
CPI Year A – CPI Year B X 100
CPI Year B
CPI Year A: 180
CPI Year B: 178
• If inflation rate stays between 1-3% (2-4) we are in good
shape
• If inflation rate exceeds 5% we may be in trouble and the
economy is deemed “unpredictable”
• People will stop investing
• May stop using banks as often
• Employment may be jeopardized (lack of expansion)
• Hyperinflation: inflation that is out of control. 100-500% in a
month.
• Hyperinflation occurred in Germany after WWII
• There are three theories you need to know:
• Quantity Theory
• Demand-Pull Theory
• Cost-Push Theory
• This theory states that inflation occurs when there is too much
money in the economy
• This is why we have the Federal Reserve – to regulate how
much money is printed
• This is why we can’t just “print more money” because we are in
debt
• If US dollars were everywhere and easy to come by they
wouldn’t have value (hyperinflation or excessive inflation)
• This theory states that inflation occurs when demand for goods
and services exceeds existing supplies
• Example: During a war, the government has a huge demand for
certain goods (ie: steel). This heavy demand makes the items
more valuable and thus more expensive
• Remember supply and demand?! Determinants! When demand
is high, prices go higher! As prices go higher, supply will
increase!
• This theory states that inflation occurs when producers raise
prices to meet increased costs
• The home prices have gone up because all the building
materials have gone up (wood, metals, plastics)
• Cost of fast food increases because cost of food itself increases
and wages of workers increase
• Purchasing power is reduced
• Income
• Most salaried careers offer a 2% annual increase to keep up with
inflation
• Most hourly paying jobs do not. If you do not get a raise, inflation will
outpace your earnings
• Interest rates
• The interest you earn from investments decreases by the inflation rate
because now the money you earn is worth less
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What is cost-push inflation?
What is quantity inflation?
What is demand-pull inflation?
Within what percentage points is inflation
normal?
• What is super crazy high inflation called?
• Define inflation
• What is cost-push inflation?
• Resource costs go up, cost pushed onto consumer – costs rise
• What is quantity inflation?
• There is too much money in economy which devalues currency
• What is demand-pull inflation?
• There is a shortage of something, so prices are raised
• Within what percentage points is inflation normal?
• 1-3%
• What is super crazy high inflation called?
• Hyperinflation
• Define inflation
• General increase in prices