1. Macro #16: Inflation What can you get for a dollar today?

2. I Want Candy! $1 $2 $5

3. I Want Candy! $1 $2 $5

4. I Want Candy! $1 $2 $5 $10 $50 $100

5. 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

6. 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

7. 2. Cost-Push Inflation Producers must raise prices in order to cover higher cost of resources –Crop failures, natural disasters, higher wages

8. What has been happening to the price of gas? What type of inflation would this be?

9. 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

10. We Americans love our Oreos! [1922] 32 cents/lbOreos [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

11. 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?

12. 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

13. 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 $$$!

14. 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.