4. oHow much is the average
movie ticket today?
oHow much do you think the
average ticket was in
1970?
7. • Inflation: a general increase in
prices across an economy
• Over time prices have increased but
so have wages
• Purchasing power: the ability to
purchase goods and services
MONEY
8. Why can more people
afford a car today than
they could in 1908,
despite much higher
car prices?
9. • To measure inflation, economists compare price levels
• Price index: a measurement that shows how the average price of a
standard group of goods changes over time
• Price indexes help consumers and businesspeople make economic
decisions
• The government also uses indexes in making policy decisions
10. • The best-known price index, the Consumer
Price Index (CPI), focuses on consumers
• Consumer Price Index: a price index
determined by measuring the price of a
standard group of goods meant to
represent the “market basket” of a typical
urban consumer
• Market basket: a representative collection
of goods and services
• The market basket is divided into eight
categories of goods and services
• The BLS updates the items in the market
basket about every 10 years based on a
Consumer Expenditure Survey
11. • Inflation rate: the percentage rate of
change in price level over time
• To determine the CPI, the BLS
establishes a based period to which
it can compare prices
• Currently the base period is 1982-
1984
• The BLS determines the CPI for a
given year using the following
formula:
CPI = updated cost x 100
base period cost
12. • Inflation rates in the United States have
changed greatly over time
• When the inflation rate exceeds 5
percent, it makes economic planning
difficult
• Core inflation rate: the rate of inflation
excluding the effects of food and
energy prices
• The worst kind of inflation is
hyperinflation in which inflation rates
can go as high as 100 or even 500
percent per month
• Hyperinflation: inflation that is out of
control
13. • Where does inflation come from?
• Price levels can rise steeply when demand for goods/services exceeds
the supply available at current prices (wartime) or when productivity is
restricted (drought leads to poor harvest)
• Nobody can explain every instance of rising price levels
• Economists offer several theories about the causes of inflation
14. • Quantity theory: the
theory that too much
money in the economy
causes inflation
• The money supply
should be carefully
monitored to keep it in
line with the nation’s
productivity as
measured by real GDP
15. • Demand-pull theory: theory
that inflation occurs when
demand for goods/services
exceeds existing supplies
• For example: Wartime
- needs of the government put
pressure on producers
- Heavy demand for new
equipment, supplies, and
services makes those items
more valuable forcing their
prices up
- Wages also rise as the
demand for labor increases
along with the demand for
goods
16. • Cost-push theory: theory that
inflation occurs when
producers raise prices in order
to meet increased costs
• Higher prices for raw materials
can cause costs to increase
• Wage increases are usually the
biggest reason since wages are
the largest single production
cost for most companies
• Can lead to a spiral of ever-
higher prices
17. • Wage-price spiral: the process by which rising wages cause higher
prices, and higher prices cause higher wages
• Increasing wages can lead to a spiral of ever-higher price because one
increase in costs leads to an increase in prices, which leads to another
increase in costs, and on and on
19. • High inflation is a major
economic problem,
effecting purchasing
power, income, and
interest rates
• Inflation can erode
purchasing power
• If the inflation rate is 10
percent, $1.00 will buy the
equivalent of only $.90
world of goods today
20. • Inflation sometimes, by not always, erodes income
• Fixed income: income that does not increase even when prices go up
• If workers’ wages do not increase as much as inflation does, they are in a worse
economic position than before
• People living on a fixed income, like retired people, are especially hard hit by
inflation because their money does not increase, even when prices go up
21. • People receive a given
amount of interest on
money in their savings
accounts, but their true
return depends on the
rate of inflation
• If the inflation rate is
higher than the bank’s
interest rates, savers
lose money
22. • Americans under age 30 have experienced fairly
low inflation rates for most of their lifetimes
• In the 2000s, the economy actually seemed to be
experiencing a period of deflation, or a sustained
drop in the price levels
• Deflation: a sustained drop in the price level
• However, by mid-2008, inflation was becoming a
worry
• The CPI rose 1.1 percent in June
• Higher production costs, fueled by a 6.6 percent
increase in energy prices, helped push the annual
inflation rate to more than 4 percent.
• Economy recovered and inflation remained at a
comfortably low level for consumers
25. What is the purpose of the CPI?
a.Determine real GDP
b.Compare prices over
time
c.Control prices in the
market basket
d.Create excess demand
26. Which of the following is not part of the market
basket?
a.Vacation
b.Housing
c.Education
d.Apparel & Upkeep
27. All of the following are causes for inflation
except __________.
a.Cost push theory
b.Core inflation theory
c.Demand pull theory
d.Quantity theory
28. What causes a wage price spiral?
a.Wage increases
b.Hyperinflation
c.Pull push theory
d.Increased income tax
29. _________ is when inflation is out of
control.
a.Market basket
b.Quantity theory
c.Hyperinflation
d.Core inflation theory
