Inflation a general increase in prices measured over time Purchasing Power the strength of a person’s wages versus the rising prices brought on by inflation Consumer Price Index (CPI) the prices of a variety of a “basket of goods” that is measured from month to month to observe the overall inflation rate (rise in prices) Quantity Theory higher prices are caused by too much money being in circulation. Inflation can be controlled by the money supply. Demand-Pull Theory higher prices are caused simply by demand exceeding the number of goods that can be supplied. Cost-Push Theory higher prices result in the costs of production increasing (largely due to increases in wages). As workers demand higher wages, cost of goods goes up causing even higher demand of wages (Wage-Price Spiral) Deflation a general decrease in prices measured over time

1Avatar$737,266, Avatar 2 Titanic$600,788, Titanic 3The Dark Knight$533,345, The Dark Knight 4 Star Wars$460,998, ^Star Wars 5Shrek 2$441,226, Shrek 2 6E.T.: The Extra-Terrestrial$435,110, ^E.T.: The Extra-Terrestrial 7Episode I - The Phantom Menace$431,088, Episode I - The Phantom Menace 8Pirates: Dead Man's Chest$423,315, Pirates: Dead Man's Chest 9Spider-Man$403,706, Spider-Man 10 Transformers: Revenge of the Fallen $402,111, Transformers: Revenge of the Fallen

Dalmatians$760,370,300$144,880, ^101 Dalmatians 12 The Empire Strikes Back$747,154,600$290,475, ^The Empire Strikes Back 13 Ben-Hur$745,780,000$74,000, Ben-Hur 14 Avatar (#1)$737,266,500$737,266, Avatar 15 Return of the Jedi$715,792,100$309,306, ^Return of the Jedi 16 The Sting$678,377,100$156,000, The Sting 17 Raiders of the Lost Ark$670,759,500$242,374, ^Raiders of the Lost Ark 18 Jurassic Park$656,026,500$357,067, Jurassic Park 19 The Graduate$651,198,300$104,901, ^The Graduate 20 Episode I - Phantom Menace (#7) $645,524,400$431,088, Episode I - Phantom Menace

1 Gone with the Wind$1,537,559,600 $198,676, ^Gone with the Wind 2 Star Wars (#4)$1,355,490,100 $460,998, ^Star Wars 3 The Sound of Music$1,083,781,000 $158,671, The Sound of Music 4 ET: The Extra-Terrestrial(#6)$1,079,511,500 $435,110, ^ET: The Extra-Terrestrial 5 The Ten Commandments $996,910,000 $65,500, The Ten Commandments 6 Titanic (#2) $976,712,200 $600,788, Titanic 7 Jaws $974,679,800 $260,000, Jaws 8 Doctor Zhivago $944,670,800 $111,721, Doctor Zhivago 9 The Exorcist $841,427,600 $232,671, ^The Exorcist 10 Snow White & the Seven Dwarfs $829,490,000 $184,925, ^ Snow White & the Seven Dwarfs

 What are the effects of rising prices?  How do economists use price indexes?  How is the inflation rate calculated?  What are the causes and effects of inflation?

 Inflation is a general increase in prices. Milk: 1950 = $0.84 today = $3.78 Gas: 1980 = $0.89 today = $2.95 Big Mac: 1967 = $0.45 today = $3.85 tuition: 1986 = $2500 today = $25,000 Atari: 1977 = $199 / $20 today = $500 / $70

 Purchasing power, the ability to purchase goods and services, is decreased by rising prices.

 Price level is the relative cost of goods and services in the entire economy at a given point in time.

A price index is a measurement that shows how the average price of a standard group of goods changes over time.  The consumer price index (CPI) is computed each month by the Bureau of Labor Statistics.

 The CPI is determined by measuring the price of a standard group of goods meant to represent the typical “market basket” of an urban consumer.

 Changes in the CPI from month to month help economists measure the economy’s inflation rate.  The inflation rate is the percentage change in price level over time.

 To determine the inflation rate from one year to the next, use the following steps.  When the inflation rate stays low (1-3% change), it typically does not cause problems for the economy.  5% Inflation causes problems and makes saving, retirement planning, etc. difficult to predict.

The Quantity Theory  The quantity theory of inflation states that too much money in the economy leads to inflation.  Adherents to this theory maintain that inflation can be tamed by increasing the money supply at the same rate that the economy is growing.  Further, too much money in the system causes purchasing power boom, thus leading to price increases (inflation!).

The Demand-Pull Theory Changes to aggregate demand can cause inflation to occur when demand for goods and services exceeds existing supplies.  “Too much money spent chasing too few goods.”  Caused by a decrease in unemployment.

The Cost-Push Theory  According to the cost-push theory, inflation occurs when producers raise prices in order to meet increased costs, or changes in aggregate supply.  Cost-push inflation can lead to a wage-price spiral — the process by which rising wages cause higher prices, and higher prices cause higher wages.

 High inflation is a major economic problem, especially when inflation rates change greatly from year to year. Purchasing Power  In an inflationary economy, a dollar loses value. It will not buy the same amount of goods that it did in years past. Interest Rates  When a bank's interest rate matches the inflation rate, savers break even. When a bank's interest rate is lower than the inflation rate, savers lose money. Income  If wage increases match the inflation rate, a worker's real income stays the same. If income is fixed income, or income that does not increase even when prices go up, the economic effects of inflation can be harmful.

 Why does purchasing power decrease over time?  How do economists calculate the CPI?  What happens when income doesn’t keep up pace with inflation?  Why would low unemployment lead to higher inflation?

 What effects does inflation have on an economy, on individuals, and on businesses?  Are these issues always harmful? Explain.  How can inflation be prevented?