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Ch 13 Sec 2 “Inflation”
Inflation a general increase in prices measured over time
Purchasing Power the strength of a person’s wages versus the rising prices brought on by inflation
Consumer Price Index (CPI) the prices of a variety of a “basket of goods” that is measured from month to month to observe the overall inflation rate (rise in prices)
Quantity Theory higher prices are caused by too much money being in circulation. Inflation can be controlled by the money supply.
Demand-Pull Theory higher prices are caused simply by demand exceeding the number of goods that can be supplied.
Cost-Push Theory higher prices result in the costs of production increasing (largely due to increases in wages). As workers demand higher wages, cost of goods goes up causing even higher demand of wages (Wage-Price Spiral)
Deflation a general decrease in prices measured over time
Top 10 Movies of All Time (Unadjusted)
1 Avatar $737,266,471 20092 Titanic $600,788,188 19973 The Dark Knight $533,345,358
20084 Star Wars $460,998,007
1977^5 Shrek 2 $441,226,247
20046 E.T.: The Extra-Terrestrial $435,110,554
1982^7 Episode I - The Phantom Menace $431,088,301
19998 Pirates: Dead Man's Chest $423,315,812
20069 Spider-Man $403,706,375 200210 Transformers: Revenge of the Fallen $402,111,870
2009
Top 20 Movies of All Time (Adjusted)
11 101 Dalmatians $760,370,300 $144,880,0141961^
12 The Empire Strikes Back $747,154,600 $290,475,0671980^
13 Ben-Hur $745,780,000 $74,000,0001959
14 Avatar (#1) $737,266,500 $737,266,5002009
15 Return of the Jedi $715,792,100 $309,306,1771983^
16 The Sting $678,377,100 $156,000,0001973
17 Raiders of the Lost Ark $670,759,500 $242,374,4541981^
18 Jurassic Park $656,026,500 $357,067,947 199319 The Graduate $651,198,300 $104,901,839 1967^20 Episode I - Phantom Menace (#7) $645,524,400 $431,088,301
1999
Top 20 Movies of All Time (Adjusted)
1 Gone with the Wind $1,537,559,600 $198,676,459 1939^
2 Star Wars (#4) $1,355,490,100 $460,998,0071977^
3 The Sound of Music $1,083,781,000 $158,671,368 1965
4 ET: The Extra-Terrestrial(#6) $1,079,511,500 $435,110,554 1982^
5 The Ten Commandments $996,910,000 $65,500,000 1956
6 Titanic (#2) $976,712,200 $600,788,188 1997
7 Jaws $974,679,800 $260,000,000 1975
8 Doctor Zhivago $944,670,800 $111,721,9101965
9 The Exorcist $841,427,600 $232,671,011 1973^
10 Snow White & the Seven Dwarfs $829,490,000 $184,925,486 1937^
Inflation
What are the effects of rising prices?
How do economists use price indexes?
How is the inflation rate calculated?
What are the causes and effects of inflation?
The Effects of Rising Prices Inflation is a general increase in prices.
Milk: 1950 = $0.84
today = $3.78
Gas: 1980 = $0.89
today = $2.95
Big Mac: 1967 = $0.45
today = $3.85
tuition: 1986 = $2500
today = $25,000
Atari: 1977 = $199 / $20
today = $500 / $70
The Effects of Rising Prices
Purchasing power, the ability to purchase goods and services, is decreased by rising prices.
The Effects of Rising Prices
Price level is the relative cost of goods and services in the entire economy at a given point in time.
A price index is a measurement that shows how the average price of a standard group of goods changes
over time.
Price Indexes
The consumer price index (CPI) is computed each month by the Bureau of Labor Statistics.
Price Indexes
The CPI is determined by measuring the price of a standard group of goods meant to represent the typical “market basket” of an urban consumer.
Price Indexes Changes in the CPI from month to month help
economists measure the economy’s inflation rate. The inflation rate is the percentage change in price
level over time.
Calculating Inflation
To determine the inflation rate from one year to the next, use the following steps.
When the inflation rate stays low (1-3% change), it typically does not cause problems for the economy.
5% Inflation causes problems and makes saving, retirement planning, etc. difficult to predict.
Causes of InflationThe Quantity Theory The quantity theory of
inflation states that too much money in the economy leads to inflation.
Adherents to this theory maintain that inflation can be tamed by increasing the money supply at the same rate that the economy is growing.
Further, too much money in the system causes purchasing power boom, thus leading to price increases (inflation!).
Causes of Inflation
The Demand-Pull Theory
• Changes to aggregate demand can cause inflation to occur when demand for goods and services exceeds existing supplies.
“Too much money spent chasing too few goods.”
Caused by a decrease in unemployment.
Causes of InflationThe Cost-Push Theory According to the cost-push theory, inflation occurs when
producers raise prices in order to meet increased costs, or changes in aggregate supply.
Cost-push inflation can lead to a wage-price spiral — the process by which rising wages cause higher prices, and higher prices cause higher wages.
Effects of Inflation High inflation is a major economic
problem, especially when inflation rates change greatly from year to year.Purchasing Power In an inflationary economy, a dollar loses value. It will not buy
the same amount of goods that it did in years past.Interest Rates When a bank's interest rate matches the inflation rate, savers
break even. When a bank's interest rate is lower than the inflation rate, savers lose money.
Income If wage increases match the inflation rate, a worker's real
income stays the same. If income is fixed income, or income that does not increase even when prices go up, the economic effects of inflation can be harmful.
Critical Thinking
Why does purchasing power decrease over time?
How do economists calculate the CPI?
What happens when income doesn’t keep up pace with inflation?
Why would low unemployment lead to higher inflation?
Exit Question -
What effects does inflation have on an economy, on individuals, and on businesses? Are these issues always harmful? Explain. How can inflation be prevented?
