1. Inflation & Stagflation
Edgenuity Lesson 3.4

2. Inflation Deflation Definitions Occurs when prices steadily decrease
A sustained increase in prices
Goods and services get more expensive
Reduces purchasing power for individuals
Causes money to lose value over time
Occurs when prices steadily decrease
Causes falling prices
Usually accompanies falling demand and economic problems

4. Measuring Inflation
Inflation rate = annual rate at which prices increase
Inflation rate = ((final value – initial value)/initial value) X 100
Typical rate in the US is 2.5% per year
When the rate of inflation declines, it is call disinflation (lower rate of inflation than the year before, different from deflation)

5. Consumer Price Index (CPI)
Most common measure of inflation
Calculated by US Bureau of Labor Statistics
Collects prices of goods in a market basket (commonly purchased items)

6. Gasoline costs more to produce and purchase than tomatoes.
Why is gasoline weighted more heavily than tomatoes in a calculation of the annual inflation rate in the United States?
Gasoline costs more to produce and purchase than tomatoes.
Gasoline is imported from other nations at a higher rate than tomatoes.
Americans purchase many more boxes of tomatoes than barrels of gasoline.
Americans spend more money on gasoline than tomatoes, on average.

7. Nominal vs. Real GDP GDP – Gross Domestic Product (economic indicator)
Nominal measurements do not account for outside factors
Real measurements account for inflation and price changes

8. Nominal vs. Real GDP

9. Causes of Demand-Pull Inflation
Occurs because of increasing demand
As demand increases, so do prices
Generally occurs when economic conditions are strong
Step-by-step:
Consumers are employed and have funds for new cars.
Dealers raise prices to match demand.
Demand increases for goods needed to make cars.
Prices of these goods also increase.
Causes inflation to spread across the economy.

10. Effect of Demand-Pull Inflation
Low inflation rates (2-3%) are a sign of a healthy economy
Occurs as demand steadily increases
Governments target a low, positive rate of inflation
Generally results in an increase in production to keep up with demand (job growth)

11. Cost-Push Inflation Step-by-step: Caused by increased production costs
Companies raise prices to pass on these costs to consumers
Rising prices cause inflation over time
Step-by-step:
Rising gas prices increase transportation costs
Companies spend more on transporting goods
Consumers pay higher prices for many products
Causes inflation to spread across the economy

12. HyperInflation Occurs when prices rise extremely quickly
Money can become worthless
Gov’t prints more money, resulting in even faster inflation

13. Effects of High Inflation
Increases uncertainty
Real incomes fall (especially tough for low-income families)
Banks grant fewer loans
Interest rates rise, so the cost of borrowing is higher
Affects both homes and businesses

14. Inflationary Spiral Leads to More Inflation

15. Stagflation Individuals will: Occurs when an economy is experiencing
Worry about losing their jobs & about inflation
This causes less spending
Spending less money leads to an economic slowdown
Occurs when an economy is experiencing
A damaging rate of inflation
A low level of production of goods and services
A high level of unemployment

16. Stagflation Effects Reduces value of currency
Decreases production and GDP
Decreases trade with other economies

17. Demand-pull inflation occurs when
the price of goods rises suddenly and extremely fast.
consumers begin purchasing more goods.
producers need more money to make and distribute goods.
the government prints more money and pushes prices up.

18. Typically, low inflation is a sign of
a healthy economy because it results from a steady rise in demand.
a healthy economy because it results from a steady rise in supply.
a struggling economy because it results from a steady fall in demand.
a struggling economy because it results from a steady fall in supply.

19. Typically, High inflation is a sign of
a struggling economy because wages cannot keep up with the increase in prices.
a healthy economy because it results from a fall in production costs.
a healthy economy because it results from a rise in consumer interest.
a struggling economy because it results from a fall in consumer interest.