1. Did You Know?  Tug of War was an Olympic event between 1900 and 1920.  When basketball was first invented the hoops were a peach baskets with a bottom. Each time they made a basket the referee would climb on a ladder and get the ball. Also, a soccer ball was used. The rules were maintained until 1891.  A man named Charles Osbourne had the hiccups for approximately sixty-nine years.  It’s possible to lead a cow upstairs, but not downstairs.

2. Inflation Unit V: Macroeconomics Lesson 3

3.  Inflation: a general increase in price levels across an economy relative to the money available  Inflation affects purchasing power- the ability to buy goods and services  As prices go up, the purchasing power will go down  This causes problems for people on fixed incomes  Inflation decreases savings, as interest rate gains have difficulty keeping up with inflation loss Inflation

4.  In general, Inflation means that you cannot buy as much today as you could in the past with the same amount of money  “The value of the dollar has gone down” Inflation

5. Examples Movie Tickets  1960: 69 cents  1980: $2.69  2000: $5.39  2011: $7.96 Bread  1960: 20 cents  1980: 53 cents  2000: $1.00  2011: $1.41

6. Examples Jay-Z’s Wealth  Today: $42 Million  1965: 5.7 Million  1913: 1.8 Million Henry Ford’s Money  1947: $18.5 Billion  1975: $46 Billion  2013: 199 Billion

7. Price Indexes  To measure inflation, economists compare price levels.  To help them calculate price level, economists use a price index, which is 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.

8.  The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by consumers for a market basket of goods and services.  Market basket – a fixed list of items used to track inflation  Used for a long period of time (base year is 1984)  Formula: New Price/ Old (Base) Price x 100  Example: $1.31/$1.00* 100= 131 Consumer Price Index

9.  The Market Basket is divided into eight categories of goods and services  About every 10 years, the items in the market basket are updated to account for shifting consumer buying habits.

10.  Inflation Rate: the percentage rate of change in price level over time  Normally calculated in a one year period  Inflation Rate= Final Year-Initial Year/ Initial Year x 100  Example: CPI 2004 is 133, CPI 2005 is 137  Inflation Rate= 137-133/133 x 100= 3% Inflation Rate Inflation Rate

11.  Economists often study the core inflation rate- the rate of inflation after removing the effects of food and energy prices  When the inflation rate stays between 1% and 3% it does not usually cause problems for and economy  When the inflation rate becomes higher than 5%, problems begin to develop Inflation Rate

13.  Extremely rapid or out of control inflation  Inflation Rates can go as high as 100 or even 500 percent per month  This level of inflation is rare and when it occurs it can cause an entire economy to collapse Hyperinflation

14.  To pay off their WWI debts Germany decided to print mass amounts of money  This devastated their economy and caused hyperinflation  A loaf of bread rose to 200,000,000,000 marks  Restaurants did not print menus because by the time food was ordered and served the price went up  People would shop with wheelbarrows full of money Germany After WWI

15.  Changes in aggregate demand can cause inflation because when the demand for goods and services exceeds existing supplies prices will change  This causes shortages and suppliers raise prices to compensate  This is also known as the demand-pull theory Changes in Aggregate Demand

16.  Changes in aggregate supply can cause inflation because producers will begin to raise their prices to compensate for increased production costs  Increases in workers’ wages are the largest single production cost for most companies  This is also known as the cost-push theory Changes in Aggregate Supply

17.  The money supply of an economy is constantly changing as economies are becoming more intertwined  Too much money in an economy can cause inflation  The Quantity Theory  Economists believe that the money supply should be increased at the same rate that the economy grows  The money supply should be kept in line with the nation’s real GDP Growth of Money Supply

18.  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 Wage-Price Spiral

19.  Inflation erodes purchasing power  If the inflation rate is 10%, $1.00 will buy you $.90 worth of goods  The dollar has depreciated  Fixed incomes are hit hard as their money does not increase, but prices do  If the inflation rate is higher than the bank’s interest rates, savers will lose money Effects of Inflation

20.  Deflation: a general decline in the price levels  Usually occurs during a period of slow economic growth Deflation

21.  Unemployment and Inflation are generally inverse of one another- one goes up, the other goes down  Low unemployment means workers are scarce, this leads to higher wages, which leads to higher prices  When both rise at the same time it is called stagflation Unemployment Correlation