Download Inflation

______________________’ S THEORY OF INFLATION
• What is inflation (CD)?
• What do you think causes inflation (CM)?
• Who does it benefit( CM)?
• Who does it hurt (CM)?
• What types of societal problems could it cause (CM)?
• Can you think of any examples where rising prices
created a climate of political or social unrest
(CD/CM)?
HOW MUCH DOES IT COST???????
HOW MUCH DOES IT COST??????
HOW MUCH DOES IT COST???????
HOW MUCH DOES IT COST?????
WHAT IS IT?????????????
Inflation is when prices increase over time
Deflation is when prices decrease over time
1-2% is acceptable
Creeping, Galloping, Hyper are unacceptable
Inflation is measured by Price Indexes
PRICE INDEXES
CPI- The consumer price index. Measures the change in prices of
consumer goods in various categories.
PPI- The producer price index. Measures the change in prices of
capital goods.
GDP Deflator- The most comprehensive price index a combination
of the CPI and the PPI. Measures the change in the price of over
40,000 products.
PRICE INDEXES
Measure the price change in a market basket of goods.
What is in the CPI?
FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
APPAREL (men's shirts and sweaters, women's dresses, jewelry)
TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital
services)
RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);
EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and
accessories);
OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral
expenses).
INFLATION SUMMARY VID
http://www.youtube.com/watch?v=SmOMp8gycMA&feature=related
EXAMPLE
Market Basket of Products
Product
Milk
Eggs
Chicken
Tooth Paste
Coke
Gas
Bread
Total
Value
% Inflation
Base Year
1.00
.75
1.50
.75
.50
.75
.50
$ 5.75
100
0%
Current Year
3.00
1.50
2.00
1.00
1.25
2.50
1.50
12.75
(CY / BY)100 =(x)= 221.7
x-100= 121.7%
CPI FOR FOOD
CPI FOR MEDICAL CARE
CPI FOR HOUSING
WHAT CAUSES INFLATION?
?
WHAT CAUSES INFLATION??
Demand-Pull Inflation
WHAT CAUSES INFLATION??
Cost-Push Inflation
HOW WOULD UNEMPLOYMENT AFFECT INFLATION?
DEFICIT SPENDING
-Increases in government debts drives down the value of
the dollar (purchasing power)
- If the value of decreases it takes more $’s to purchase
the item.
- Monetizing the Debt, aka printing more $’s
- Inflating your way out of debt.
HOW DOES THE MONEY SUPPLY AFFECT PRICE
LEVELS?
Low
P
r
i
c
e
l
e
v
e
High l
Excessive Monetary Growth causes Inflation.
- When Money Supply grows faster than GDP
INFLATION….GOOD???? BAD????
H E L P E D B Y I N F L AT I O N
H U R T B Y I N F L AT I O N
-Borrowers with fixed
payments
-Banks with fixed rate
loans
-Banks with fixed rate
savings accounts
-Borrowers with
adjustable rate loans
-Government in debt
-People with fixed rate
savings accounts
-Fixed rate contracts
- People living on fixed
incomes
PROBLEMS AND APPLICATION
P 544; Problems… #1,#6
WAS BABE RUTH’S SALARY GOOD COMPARED
TO TODAY’S PLAYERS?
Babe’s 1931 salary - $81,000
CPI 1931 – 15.2
CPI 2005 – 195
Amount in today’s $’s = (P level today/P level in year T) * 81,000
GRAPHING PRACTICE
Show the following on an aggregate demand (AD)
aggregate supply (AS)
• What is the effect on price levels and GDP if personal income taxes
are increased?
• Same for a decrease?
• Could the government use tax rates to influence the economy?
• What is the effect on price levels and GDP if energy costs
increase?
Show the following on a money market graph:
 What does an increase in the money supply do to
nominal interest rate and price levels? What is the
likely affect on the economy?