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Inflation Changes in Pricing Price Comparisons • 1936 - $1989 • 2010 - $30,171 • 2012 - $110,000 • 1969 - $3714 • 2012 - $22,467 • Mint - $67,700 • • • • 1987 - $64.99 2012 - $126.63 In Box - $500 Respectively - $33.13 Inflation • Increase on average level of prices over time $ AS Average Level of Prices AD Total G/S GDP/GNP Q Rate of Inflation • Comparing the CPI of a base year to CPI of other years % = A – B x 100 A • 2-4 % is normal and good • Deflation – decrease in the average level of prices Types of Inflation • Creeping Inflation ▫ Low inflation for a long period of time • Chronic Inflation ▫ Inflation steadily rising over a long period of time • Hyperinflation ▫ Out of control ▫ 1000% Theories • Quantity ▫ Too much money in the economy ▫ More dollars are printed than the country’s worth • Demand –Pull ▫ Consumer demand is too high • Cost-Push ▫ Costs of production decrease supply ▫ Costs shifted to consumers Demand-Pull $ AS E2 E AD Q AD2 Cost-Push AS2 $ AS E2 E AD Q Questions • What should be done to combat inflation? • Should economic growth be slowed to guard against inflation? • How would you stop inflation? • Who should be responsible for this in the US?