Inflation. Consumer Price Index (CPI) A price index determined by measuring the price of a standard group of goods meant to represent the “market basket”

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Presentation transcript:

Inflation

Consumer Price Index (CPI) 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 Inflation is a general increase in prices. It is ok so long as wages increase with it.

What are the causes and effects of inflation? Inflation is caused by: - The growth of the money supply - changes in aggregate demand - changes in aggregate supply The effects of inflation are: - decrease in purchasing power - diminishes real income - decrease in savings interest rates

Bread, white per pound--- $.85 Eggs per dozen- $1.14 Milk (gallon) - $2.54 $1.35 $2.20 $3.78

Causes of Inflation Changes in aggregate demand: inflation can occur when demand exceeds existing supplies Changes in aggregate supply: inflation can occur when producers raise prices in order to meet increased costs –Wage increases are the largest single production cost for most companies

Wage-Price Spiral Increasing wages can lead to a spiral of ever-higher prices because one increase in wages leads to an increase in prices, which leads to wage increases and so on People on fixed-incomes suffer!!!

INFLATION HURTS The savers : Those who stash away their money (and no invest) will see the value of it diminish with inflation over time

How to fight inflation? The Worst way to fight inflation is to institute government wage and price controls

Cost-Push Inflation Inflation that occurs from Increasing costs leading to a decrease in the aggregate supply curve –Causing equilibrium price to increase and equilibrium quantity to decrease –WHITEBOARD FOR EXAMPLE