1. Key Terms inflation: a general increase in prices across an economy
purchasing power: the ability to purchase goods and services
price index: a measurement that shows how the average price of a standard group of goods changes over time
Consumer Price Index: 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

2. Key Terms, cont.
market basket: a representative collection of goods and services
inflation rate: the percentage rate of change in price level over time
hyperinflation: inflation that is out of control

3. Introduction 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 include:
Decrease in purchasing power
Erodes income
Decrease in interest rates

4. The Effects of Rising Prices
General increase in prices across an economy.
Over the years, prices generally go up.
Shrinks the value, or purchasing power of things.

5. Price Indexes To measure inflation, economists compare price levels.
Economists use a price index,
Measurement that shows how the average price of a standard group of goods changes over time.
PI helps consumers and business people make economic decisions.
The government also uses indexes in making policy decisions.

6. Consumer Price Index
The best-known price index, the Consumer Price Index (CPI), focuses on consumers.
Determined by measuring the price of a standard group meant to represent the “market basket” of a typical urban consumer.
The market basket (right) is divided into eight categories of goods and services.

7. Types of Inflation
Inflation rates in the United States have changed greatly over time.
>5% inflation makes planning difficult.
The worst kind of inflation is hyperinflation
^^^ % per month
Answer: 1970, 1974, 1976, 1978, 1980, 1982, 1990
In what years was inflation so high that it made economic planning difficult?

8. Causes of Inflation :What are the three causes of inflation?
Growth of money supply
too much money in the economy causes inflation
Changes in aggregate demand
demand for goods and services exceeds existing supplies
Changes in aggregate supply
producers raise prices in order to meet increased costs.
Wage increases are the largest single production cost for most companies.
Checkpoint Answer: growth of money supply, changes in aggregate demand, changes in aggregate supply

9. Wage-Price Spiral
Increased cost >>> increased prices >>> increased cost >>> increased prices
This process is known as the wage-price spiral.

10. Effects of Inflation
High inflation is a major economic problem, affecting purchasing power, income, and interest rates.
Inflation can erode purchasing power. If the inflation rate is 10 percent, $1.00 will buy the equivalent of only $.90 world of goods today.

11. Effects on Income Inflation sometimes, by not always, erodes income.
Wage increases vs inflation
People living on a fixed income

12. Effects on Interest Rates
People receive a given amount of interest on money in their savings accounts, but their true return depends on the rate of inflation.
If the inflation rate is higher than the bank’s interest rates, savers lose money.