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Chapter 13 Section 2

Chapter 13 Section 2. Inflation. Inflation - Is a general increase in prices; such as, over the years, prices rise and fall, but in the American economy, they have mostly risen. Since world war ll, real estate have risen greatly.

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Chapter 13 Section 2

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  1. Chapter 13 Section 2

  2. Inflation

  3. Inflation - Is a general increase in prices; such as, over the years, prices rise and fall, but in the American economy, they have mostly risen. Since world war ll, real estate have risen greatly.

  4. Purchasing power-is the ability to purchase goods and services.As prices rise, the purchasing power of money declines.That is why $12,000 can buy much less than it could fifty years ago.

  5. Price Index-is a measurement that shows how the average price of a standard groups of goods change over time.A price index produces an average that economists can compare to earlier averages to see how much prices have changed over time.

  6. Using Price IndexPrice indexes help consumers and business-people make economic decisions. The government also uses indexes in making policy decisions.A member of Congress, for example, might push for an increase in the minimum wage if she thinks inflation has shrunk purchasing power.

  7. Consumer Price Index(CPI) Although, there are several price indexes, the best-known index focuses on consumers.CPI is determined by measuring the price of a standard group of goods meant to represent the “Market Basket” of a typical urban consumer.

  8. Market Basketis a representative collection of goods and services. By looking at the CPI, consumers, businesses, and the government can compare the cost of a group of goods this month with what the some or a similar group cost months or even years ago.

  9. Inflation Ratethe percentage rate of change in price level over time.Although there are other price indexes, the CPI is the index you will most often hear about, so we will focus on it.

  10. Types of InflationInflation rates in the United States have changed greatly over time.When the inflation rate remains low for a very long time, averaging around 1 to 3 percent per year. We call that Creeping Inflation.

  11. Creeping InflationThis level of inflation does not typically cause problems for the economy.Creeping Inflation is steady and predictable. Businesses and governments can plan their budgets, because they are fairly sure what future prices will be.

  12. Chronic Inflation-inflation that rises steadily from month to month over a long period of time.This kind of accelerating inflation is much harder on the economy.During a period of chronic inflation, businesses cannot anticipate what their costs will be in a year or even a month into the future.

  13. Hyperinflation-inflation that is out of control.During periods of hyperinflation, inflation rates can go as high as 100 or even 500 percent per month, and money loses much of its value. This level of inflation is rare, but when it occurs it often leads to economic collapse.

  14. .Causes of InflationA full explanation of the reasons for inflation incorporates all three theories.Economists therefore look at all elements of this picture when they try to understand the inflation process

  15. The Three Theories*Quantity Theory-of inflation states that there is too much money in the economy causes inflation.*Demand-Pull Theory-states that inflation occurs when demand for goods and services exceeds existing supplies.*Cost-Push Theory-inflation occurs when producers raise prices in order to meet increased costs.

  16. The Quantity TheoryEconomists at the University of Chicago developed a popular version of this theory in the 1950’s and 1960’s. They maintained that the money supply could be used to control price levels in the long term.

  17. Demand-Pull TheoryThe heavy demand for new equipment, supplies, and services makes those items more valuable, forcing their prices up.Wages also rise as the demand for labor increases along with the demand for goods.

  18. Cost-Pull TheoryHigher prices for raw materials can cause costs to increase. Wages increase, however, are most often the biggest reason, since wages are the largest single production cost for more companies.

  19. Wage-Price Spiral-The process by which rising wages cause higher prices, and higher prices cause higher wages.*Employees win a wage increase*Raise the price of its product*leads to rising costs for farmers*farmers raise their prices*leads employees to demanding higher wages

  20. Fixed Income-income that does not increase even when prices go up.The portion of their income from Social Security rises with the price level, because the government raises Social Security benefits to keep up with inflation.

  21. Interest RatesPeople receive interest on money in their savings accounts, but their true return depends on the rate of inflation.When a bank’s interest rate matches the inflation rate, savers break even.

  22. Deflation-a sustained drop in the price level.Unemployment levels in the United States during the late 1990’s remained low. Typically, when unemployment falls to low levels, inflation tends to increase. Economists had different reactions to the combination of low unemployment and low inflation.

  23. How does the BLS determine the CPI and use it to calculate the inflation rate?

  24. How does Inflation affect Purchasing Power?

  25. What is the purpose of the CPI?

  26. What causes a Wage-Price Spiral, and what can it lead to?

  27. Why did the existence of low unemployment in the 1990’s puzzle some economists?

  28. Why do families, businesses, and the government want to know the inflation rate?

  29. What is the formula for CPI?

  30. Why might an individual family experience a higher or lower inflation rate than national?

  31. Why can more people afford automobiles today than they could in 1908?

  32. What are some causes of inflation?

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