Download and inflation. - McEachern High School

Inflation
Essential Standards
The student will define the
Consumer Price Index (CPI) and
inflation.
 The student will explain how inflation
is calculated.
 The student will give examples of
who benefits and who loses from
inflation.

Inflation
Over the years, prices rise and fall…
► In the American economy, they have mostly
risen.
► Inflation—a general increase in prices.
► Purchasing power—the ability to purchase
goods & services…
► As prices rise, purchasing power…
► Declines.
►
Nominal and Real Values
►
1.
2.
►
►
►
►
To compare the difference
between prices over time,
economists use two
measurements.
Nominal value—prices NOT
adjusted for inflation…
Real value—prices that
ARE adjusted for inflation.
For example—a movie
ticket cost 35 cents in
1945…
35 cents is the nominal
value…
But 35 cents was WORTH
$4.08 in 1945…
So the REAL cost of a
ticket in 1945 was $4.08.
"In 1980, gas was only $1.30 per
gallon!" This statement is misleading
because...
A.) there were fewer cars on the road in 1980.
B.) in 1980, the US was more economically
prosperous.
C.) $1.30 only reflects the nominal value of gas
in 1980.
D.) $1.30 was worth much less in 1980 than it is
today.
Measuring Inflation



Consumer Price
Index—Is computed
each month by the
Bureau of Labor
Statistics.
It measures the
prices of a “market
basket”…
A representative
collection of goods
and services.
Contents of the Market Basket
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Utility Gas—100 therms
Electricity—500 Kwh
Fuel oil—per gallon
Gasoline—regular
unleaded
Bread—white
Ground beef—all
types—per pound
Whole chicken—per
pound
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Milk—all types—per
gallon
Apples—red delicious
Bananas
Naval oranges
Tomatoes
Orange Juice—Frozen
Coffee—ground
roast—all sizes
Iceberg lettuce
Eggs—large—per
dozen
Average price of unleaded regular gasoline in January of 2001:
Average price of same in July of 2004:
$2.13
Average price of same in July of 2008:
$4.30
Average price of same in December of 2008:
$1.91
Average price of same in September, 2012:
$3.93
Average price of same in January, 2013:
$3.35
Average price of same in January, 2014: $3.32
$1.66
► When
the inflation
rate stays
between 1% and
3%, it causes few
problems…
► When it rises
above to 5%, the
economy can
become unstable.
► Hyperinflation—
out of control
inflation…can go
as high as 100%
to 500% per
month.
Degrees of
Inflation
Economists are unsure of
exactly what causes prices
to rise at every level.
Several different theories
are used in explanation.
The
Quantity
Theory
Quantity inflation occurs when governments…
PRINT TOO MUCH MONEY.
Money is the same as any product…
 When there is TOO MUCH of something…
 What happens to its value?
 It drops!
 This is a $10 million bill from Zimbabwe…
 It is worth approximately 25 cents in US
currency.



DemandPull
Inflation



States that inflation occurs when
demand for goods and services
exceeds supplies.
During wartime, or after a natural
disaster, demand jumps…
Leading to higher prices.
Cost-Push
Inflation





Inflation occurs when producers raise
prices to meet increased costs.
If MINIMUM WAGE is increased…
Producers increase PRICES.
Whenever the COST OF DOING BUSINESS
PUSHES UP PRICES—
The result is COST-PUSH INFLATION.
Which of the following is the BEST
example of a situation that would
cause "demand-pull" inflation?
A.) OPEC raises oil prices.
B.) an increase in corporate taxes causes
overall prices to rise.
C.) an earthquake wipes out supply lines west of
the Rocky Mountains.
Which of the following is the BEST
example of a situation that would
cause "cost push" inflation?
A.) the deportation of thousands of illegal immigrants forces US
business to employ higher-paid American workers.
B.) the end of the Afghanistan War causes a dramatic increase
in tourism to that nation.
C.) Kenya decides to address its debt crisis by injecting $30
billion in currency into the economy.
D.) a tsunami in Japan wipes out the infrastructure for delivering
essential goods and services.
The Effects
of
Inflation
on WAGES
►
►
►
►
►
►
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Inflation negatively impacts wage raises.
The average teacher received a 2.1% raise in 2005—
So our paychecks grew in size by 2.1%.
However, the rate of inflation that year was 3.1%.
So those paychecks were WORTH 3.1% LESS than they
were worth the previous year.
So in REAL TERMS, what happened?
Teachers received a 1% pay reduction in 2005.
Inflation is bad for SAVERS…
 Inflation negative





impacts INTEREST.
If you have savings in a
bank that pays 2%
interest—
The AMOUNT in your
account is increasing by
2%-BUT—if the rate of
inflation is 3%-That money is actually
LOSING VALUE—
1% per year.
Inflation is good for BORROWERS
 If I borrow $5.00—
 That’s what I owe—
 NOT $5.00 PLUS
inflation—debts are
repaid in NOMINAL
TERMS.
 SO:
 When I repay my $5.00, I
am repaying slightly LESS
MONEY—
 IN REAL TERMS—
 Than I borrowed.
Deflation
 Deflation is the OPPOSITE of








inflation…
When deflation occurs, prices
DROP.
This is TREMENDOUSLY
DANGEROUS to an economy…
The expectation of future low
prices causes aggregate demand
to…
SHIFT TO THE LEFT.
And if AD shifts sharply to the left—
The economy collapses.
Deflation caused the Great
Depression—
And if deflation appears, the
government will work aggressively
to counteract it.
Governments tend to pursue policies that have
positive effects upon the lives of a MAJORITY of the
population. Knowing what you know about the
habits of the average American, you might ASSUME
that...
A.) the government tends to promote an
environment of mild inflation.
B.) the government tends to promote an
environment of mild deflation.
C.) the government tends to promote an
environment of massive inflation.
D.) the government tends to promote an
environment of massive deflation.