Date post: | 17-Jan-2016 |
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Macro #16: Inflation
What can you get for a dollar today?
I Want Candy!
•$1•$2•$5
I Want Candy!
•$1•$2•$5
I Want Candy!
•$1•$2•$5
• $10• $50• $100
Inflation • Increase in average
price level of all products
• Reduces one’s purchasing power: how much one can purchase w/ a set amount of $
• Good inflation is 2-3% per year
2 Causes of Inflation
1. Demand-Pull Inflation• Demand increases faster than production
causing prices to rise • Due to increase in money supply or use of
credit
2. Cost-Push Inflation
• Producers must raise prices in order to cover higher cost of resources – Crop failures, natural
disasters, higher wages
What has been happening to the price of gas? What type of inflation would this be?
Measuring Inflation
• Consumer Price Index (CPI): measures change in prices of goods over time– Uses a “market basket” a selection of
commonly purchased goods – It takes $9 today to purchase
what you could have bought
for a $1 in 1946
• We Americans love our Oreos![1922] 32 cents/lb
• [1932] 25 cents/lb
[1950] 34 cents/11 oz
• [1964] 39 cents/lb
• [1976] 99 cents/19 oz
[1981] 1.69/19 oz
[2008] 4.29/18 oz
Other types of Price Changes
• Deflation: decrease in prices– Sound good right? NO! prices reduce,
producers won’t make as much, won’t hire as many ppl
• Hyperinflation: huge increases in prices – Brazil now has relatively low inflation of
approx 7% BUT from 1980 – 2010 it was around 450% per year!
– How do you survive that kind of economy?
Effects of Inflation 1. Decreased purchasing power:
– A dollar just won’t get ya what it used to!
– Bad for those on fixed (set) incomes – retirees
– Good for those w/debt
Other effects …2. Decreased value of wages:
– If your wage is the same, but prices go up, you can buy less!
– COLA’s: cost of living adjustments
3. Decreased value of savings– If savings increases by 1% per year, but
prices go up 2% per year – you’re losing $$$!
How would inflation effect….
A. A person saving up to buy a home
B. A retired auto worker
C. A retail salesperson who has not received a raise in 3 years
D. A person with a high mortgage.