Today’s Schedule – 11/1 Inflation PPT HW: – Read Ch. 13, Section 3 – Start Studying for Unit 4 Test: Tuesday

What is Inflation? Why did your grandparents pay 5¢ for a soda and you pay $1.25? Inflation- A general increase in price – Ex: A home purchased in 1978 for $70,000 is now worth $800,000 With inflation, the purchasing power (the ability to buy G &S) drops

Price Indexes Price Index- Measurement that shows how the average price of a group of standard G changes over time Help us understand the increase in a price in a G or S relative to our income/standard of living

Consumer Price Index (“CPI”) A price index determined by measuring the price of a standard group of G meant to represent the market basket of a typical consumer – Calculated each month by the BLS Allows you to compare a the cost of G & S from month to prior month- Answers: Is the cost of G & S increasing in line with the increase in incomes?

Market Basket A representative collection of G & S purchased in one month Includes the following G & S: – Food/Drinks – Apparel and personal upkeep – Transportation – Medical care – Education/Communication – Other G & S – Housing – Entertainment

Market Basket Allows economists to compare the same categories of G & S over long/short periods of time – Specific items in the basket are updated every 10 years

Inflation Rate Percentage of change in price level over time

Calculating CPI BLS compares the current market basket cost (total of all goods in a basket) to a base year – Currently 1982 – 1984 CPI = current cost ÷ base year cost x 100

Types of Inflation Inflation Rate: the percentage rate of change in price level over time – Want it to be 1% – 3% – Above 5% it becomes unstable Core Inflation Rates: Inflation excluding the prices of food and energy Hyperinflation: Out of control inflation – 100% and up

What Causes Inflation? 1.Quantity Theory: Too much money in the economy causes inflation 2.Demand-Pull Theory: Inflation occurs when demand for G & S exceeds current supply of G & S 3.Cost-Push Theory: Inflation occurs when producers raise prices in order to meet increased costs

How Does Inflation Effect Us? 1.Purchasing Power: Decrease in the ability to purchase the same G or S previously bought 2.Income: Those living on a fixed income cannot increase their income to match the increased cost of the G & S 3.Interest Rates: Having a set interest rate does not always guarantee that return