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 13Inflation, Deflation, and Unemployment

What happens when you can make all the money you want?

What other ways can you create extra money?

Think about things that encourage people to spend.

Why does Uncle Scrooge hate easy money?

QOD #26: Dough Ray Me

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

= X 100

121 – 110

110= X

10010%

Gas Prices 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 InflationHere 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? 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

-Negative – if the increase in wages is less than the [rate of inflation] increase in COL

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

-Negative – if committed to a Price for goods and costs increase

-Positive – if investments outperform inflation rate

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? 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

CPICPI (later yr) – (later yr) – CPICPI (earlier yr) (earlier yr) CPICPI in earlier year in earlier year

xx 100100 ==Deflation Deflation

RateRate

Deflation MAJOR EFFECT OF DEFLATION

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 .