1. CHAPTER 11: ECONOMIC CHALLENGES
SECTION 2: INFLATION
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2. EXAMINING PRICE
FLUCTUATIONS
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3. PRICE LEVEL
Aggregate Supply: total amount of goods and services produced throughout the entire economy
Supply increases as price increases
The aggregate quantity of goods supplied is likely to be higher when the price level is higher

4. AGGREGATE DEMAND
Aggregate Demand: is the total amount of spending by individuals and businesses throughout the economy
Greater aggregate demand when price is low

5. INFLATION
Increase in the average price level of all products in the economy
Occurs when aggregate demand increases faster than aggregate supply
When quantity demanded exceeds quantity supplied, consumers must compete for limited products, and prices go up
As prices increase, value of dollar goes down

6. DEFLATION Decrease in price level of goods and services
Aggregate demand decreases more rapidly than aggregate supply
Can now buy more with your dollar because price goes down
Greatest period of deflation was the Great Depression

7. CAUSES OF INFLATION

8. CAUSES OF INFLATION DEMAND-PULL INFATION
Demand is faster than what economy can produce
Can happen from increase in money supply or increase in use of credit
FED controls money supply in the United States – pumps money into the economy or gives more credit

9. CAUSES OF INFLATION 2. Cost-Push Inflation
Producers raise prices to cover higher resource/production costs
SUPPLY SHOCKS – event that increases the cost of production for all or many firms, resulting in overall higher prices Example: (crop failure)\
OPEC – OIL

10. CAUSES OF INFLATION
Wage-Price Spiral – wages go up, prices of goods go up

11. MEASURING INFLATION

12. MEASURING INFLATION
LOOK AT AVERAGE PRICE LEVEL AS OPPOSED TO SPECIFIC PRICES

13. TWO MOST COMMON PRICE INDEXES

14. TWO MOST COMMON PRICE INDEXES
Consumer price index (CPI)– a measure over time in the price of a fixed group of products purchased by consumers
Producer Price Index (PPI) – measures average change over time in the prices of goods and services bought by producers

15. INFLATION RATE THE MONTHLY OR ANNUAL PERCENTAGE CHANGE IN PRICES
1 TO 3 % INFLATION RATE IS LOW
HYPERINFLATION – WORST DEGREE OF INFLATION. CAN RESULT IN COMPLETE ECONOMIC COLLAPSE

16. EFFECTS OF INFLATION
The purchasing power of the dollar
The value of real wages
Interest rates
Saving and investing
Production costs

17. EFFECTS OF INFLATION DECREASED PURCHASING POWER
If on a fixed income the loss of the value of dollar can really hurt
Give you cost of living adjustments (COLAs)

18. EFFECTS OF INFLATION INCREASED INTEREST RATES:
Prices increased so does the interest on the money you borrow

19. EFFECTS OF INFLATION DECREASED SAVING AND INVESTING
The higher the inflation rate the less money you get when you save – so why invest or save?

20. INCREASED PRODUCTION COSTS