Chapter 3 – Your Purchasing Power Lesson 3-1 Inflation and the Value of Money Learning goals: Explain inflation and how it is measured. List the types of inflation and how they affect consumers Discuss the causes of inflation and how consumer spending, saving, and investing are effected.

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What is inflation? Inflation is an increase in the general level of prices for goods and services. Inflation reflects how much prices are rising. What causes prices to rise? Increased demand Lack of competition Rising production costs Scarcity of resources will cause price increases.

Measuring Inflation Inflation is measured by the U. S. Government The measurement tool is called the Consumer Price Index (CPI). Uses a list of commonly bought goods and services Data is gathered and reported by the Bureau of Labor Statistics. As inflation rises, the true purchasing power of the dollar falls. Cost-of-living adjustments (COLAs) are designed to maintain (not increase) the recipient’s standard of living. If you receive a COLA, your standard of living does not go up, but remains the sames.

Types of Inflation Disinflation – occurs when prices are rising but the rate of increase is slowing down. Some products don’t increase in price as fast as others. Often occurs when demand for a product is not the same throughout the year. Reflation – occurs when high prices are lowered due to decreased demand, but are restored to the previous high level. Reflation can also happen when consumers temporarily stop buying a product or service. Can also happen when the available supply of a product goes up or down. Hyperinflation –occurs when prices are rising so rapidly that they are out of control United States has not experienced Hyperinflation Deflation – occurs when there is a general decrease in the prices of goods and services. Opposite of inflation

Controlling Inflation The Federal Reserve System (the Fed) is the central bank in the United States that controls the money supply. The Fed tries to control inflation. If prices are rising too fast, it tries to slow them down by decreasing spending. One way to do this is by raising interest rates. The Federal government also tries to manage the economy through fiscal policy. It speeds up or slows down the economy by putting more or less money in the hands of consumers by adjusting tax rates.

Types of interest rates Discount rate The rate that banks have to pay to borrow money Federal funds rate The rate at which banks can borrow from the excess reserves of other banks. Prime rate The rate that banks charge to their most creditworthy business customers. This rate is usually 3% higher than the discount rate. These rates are important because they affect the cost of credit, our standard of living, and the expansion of the economy.

Causes and Effects of Inflation Demand-pull inflation results in higher prices because consumers want to buy more goods and services than producers supply. Cost-push inflation occurs when producers raise prices because their costs to create products are rising. Affected by productivity which is a measure of the efficiency of goods and services being used. Real-cost inflation is when prices rise because the resource become scarce or more difficult to get. Rising prices often result in higher employment. Falling prices often cause laying off workers.

Inflation affects Spending, Saving, and Investing Increased prices mean you have to spend more to maintain the same standard of living, leaving you with less money to save and invest. Time value of money is a concept that says a dollar you receive in the future will be worth less than a dollar you receive today. Time value of money concept is reversed with deflation: a dollar received in the future will be worth more than the dollar you receive today, because you will be able to buy more goods with it.

Assignment Due Tuesday, January 27 – pg. 84 – Do questions 1-18, 20, 21 Read lesson 3-2 pg. 86-90