Download ECON-4.9-10.12 Inflation

AGENDA Mon 4/9 & Tues 4/10
Hudsucker Conclusion
•QOD #26: Dough Ray Me
•Inflation & Deflation
•HW: pg 350 #1-6; pg 353 #1-5
•
Chapter 13
Inflation, Deflation, and Unemployment
QOD #26: Dough Ray Me
What happens when you can make all the
money you want?
 What other ways can you create extra money?
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Think about things that encourage people to spend.
Why does Uncle Scrooge hate easy money?
What is Inflation?

Inflation is defined
as an increase in
the price level
from goods
produced and sold
in the economy.
How do we measure inflation?
Inflation Rate
=
CPI in later year – CPI in earlier year
CPI in earlier year
121 – 110
10%
=
X 100
110
X 100
Gas Prices
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Did you know that gasoline costs less in 2005 than it
did in 1980?
Impossible, you say! That is the case, though, when
prices are adjusted for inflation.
Back in 1980, a gallon of gas cost about $1.13.
More recently, in 2005 a gallon of gas cost $1.66.
Yes, $1.66 is more than $1.13, but when the rate of
inflation is figured in, the cost of a gallon of gas in
1980 was $2.68 (in 2005 dollars).
In 2012 dollars, $1.13 in 1980 is equal to $3.12.
You can use an online inflation calculator to verify
that.
Inflation Calculator
The Effects of Inflation
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Here are some ways Inflation can occur to an individual:
Mary has lived on a fixed income for the last 5 years. Each year
the price level of goods have increased; inflation has occurred,
lowering the purchasing power of Mary’s money.
This means her standard of living is going down each year.
Each year what does she decide not to purchase?
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Medicine?
Groceries?
Rent?
Utilities?
Effects of Inflation

On fixed incomes – loss of purchase power
• On savings and the rate of inflation
–Positive – if the return on savings is
greater than the rate of inflation
-Negative
– if the return on savings is
less than the rate of inflation
Effects of Inflation

On wages and the cost of living
–Positive – if the increase in wages is
greater than the increase in the COL
– if the increase in wages is less
than the [rate of inflation] increase in COL
-Negative
Effects of Inflation

On interest rates for borrowers and
lenders
-Negative
– if committed to a Price for
goods and costs increase
Effects of Inflation

Hedging against inflation – trying to avoid
or lessen a loss of purchase power
-Positive – if
investments outperform
inflation rate
-Negative – if committed to a Price for
goods and costs increase
Effects of Inflation

Inflation and past decisions
–Positive – if payment is stable and income
rises greater than the increase in the COL
-Negative
– if payment is unstable or income
is less than the increase in COL
2007 Global Inflation Rates
2008 Global Inflation Rates
2000 Global Inflation Rates
What is Deflation?

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Deflation is defined
as a decrease in the
average price level.
Deflation is
measured the same
way as inflation, by
finding the
percentage change in
prices (CPI) between
years.
Deflation
CPI (later yr) – CPI (earlier yr)
Deflation
x 100 =
CPI in earlier year
Rate
Deflation
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MAJOR EFFECT OF DEFLATION
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Not all prices fall at the same time
e.g.: (p353) LATOYA – the price of her goods falls,
but the price of raw materials does not
deflation can lead to firms going out of business
references

Arnold, R (2001). Economics in our
times, 2nd edition. Chicago, IL: National
Textbook Company .