Download I) Inflation

I) Inflation
Inflation-A sustained rise in
the general level of prices.
The value of currency is
constantly decreasing.
Conversely, prices of all
consumer goods are
constantly increasing.
A) Hyperinflation
• Hyperinflation or high
inflation can be
devastating to an
economy• Post WWI Germany
(1919-1924)
• Printed out money to
pay France & UK their
war debt rather than
taxing.
B) Low Inflation
• Low inflation can be
beneficial to an
economy (1-3%)
• Indicates moderate
growth in the
economy
c) Inflation leads to speculation
• 1) Helps debtors
(mortgages decrease in
relative value over
time)
• 2) Hurts creditors &
people with fixed
income.
II) What causes inflation?
• A) Demand pull inflationA rise in the general level
of prices caused by too
high a level of aggregate
Shortage
demand in relation to
E2
aggregate supply.
E1
D2 • This is continuously
happening because of a
constant increase in
population and an increase
in relative wealth.
D1
S
P
R
I
C
E
Quantity
b) Cost push inflation
S2
S1
P
R
I
E2
Shortage
E1
C
E
D
Quantity
• A rise in the general
level of prices that is
caused by increased
costs of making and
selling goods.
• A shortage is created
that causes prices to
rise when supply is
restricted.
III) Deflation
• A) A decline in the
average level of prices
• B) Only a problem in
Depressions
• C) Caused by an
overall drop in
aggregate demand.
S
P
R
I
Surplus
E1
E2
C
E
D2
Quantity
D1
IV)
CPI
Consumer Price Index
A catalogue of prices of numerous items
It’s used to track inflation over the years