How does the government know if the average price level is up? They send people to the store to check. Consumer Price Index. Measures price changes in commonly purchased items. June $150 Dec $180 $165
How to calculate the rate of inflation as a percentage Rate of inflation = Difference between 2 index #’s Divided by the 1 st # given x 100 Assume the CPI in 1998 was 145 and in 2000 it was 164. What was the inflation rate during this time period? 164-145, 145 19_ 145 x 100 = 13 % Could you expect your income to go up by 13% in 2 years? If you made $35, 000 in ’98, how much would you need to make in 2000 just to maintain your same standard of living? 13% x $35,000 = $4,450 (that’s how much of a raise you need) or you need to make $39,450 in 2000.
What causes prices to go up? Good Question! Demand-Pull Inflation Occurs when the total demand for goods and services exceeds total supply or when the government prints “too much money” Cost-Push Inflation Occurs when businesses raise prices in response to higher resource costs (raw materials, energy, wages) What would happen if a government let their money supply get out of control? “too much money chasing too few goods”
Germany’s Money Supply In 1919 Germany had 50,000 marks (millions of marks) in circulation. In 1923 Germany had 496,000,000,000,000 marks (in millions) in circulation.
500 Mark, Aluminum Would buy 1 dozen eggs or a pound of flour. Bread is 700 Mark a loaf.
“Hans, would you run to the store and get a loaf of bread? Here’s a billion marks.” 1 Billion Mark, October 20, 1923 Reichsbanknote Would buy ¾ Pound of Meat, 3 eggs or 1/6 Pound of Butter Bread is 670 Million Mark a loaf.
100 Billion Mark, Nov. 3 1923 City of Freital On November 1 100 Billion Mark would buy 3 pounds of meat. Bread is 3 Billion Mark a loaf. On November 15 100 Billion Mark would buy 2 glasses of beer Bread is 80 Billion Mark a loaf.
Prices were changing so fast that in a café, people would order at one price and have to pay a higher price on their way out. Printing presses only printed on one side of a bill so they could print faster. One egg cost.08mark in 1914 and 80 billion marks in 1923
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Hyperinflation: inflation that is out of control Pricing Power: businesses and industries increase prices to increase their profit margins. (oligopolistic inflation) Sectoral: increase in the price of the goods and services produced by a certain sector of industries an increase in the cost of crude oil would directly affect all the other sectors, which are directly related to the oil industry
Fiscal Inflation: Fiscal Inflation occurs when there is excess government spending