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OBJECTIVES

OBJECTIVES. At the end of the lesson students should be able to: Define the term inflation Appreciate how the RPI is calculated. Explain how inflation is calculated Discuss and evaluate the consequences of inflation. INFLATION. Definition & Main Consequences on the Economy.

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OBJECTIVES

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  1. OBJECTIVES At the end of the lesson students should be able to: Define the term inflation Appreciate how the RPI is calculated. Explain how inflation is calculated Discuss and evaluate the consequences of inflation.

  2. INFLATION Definition & Main Consequences on the Economy

  3. What is Inflation? There are several definitions of inflation : • A situation whereby there is too much money and too few goods. • A situation whereby the general price level is rising. • A situation whereby the value of money is falling.

  4. INFLATION DEFINED • Inflation is a situation where there is a sustained and persistent increase in the general or average level of prices. • Hyperinflation – very high inflation • Deflation - persistent downward movement in the average level of prices.

  5. THE EVIDENCERetail Prices of Selected Food Commodities

  6. THE EVIDENCERetail Prices of Selected Food Commodities

  7. MORE EVIDENCEOur School Canteen: A Comparison of Prices

  8. THE CONSEQUENCES OR EFFECTS OF INFLATION

  9. The Major Consequence of Inflation • Inflation causes an erosion in the purchasing power or real value of money resulting in an reduction in the quantity of goods or services it can purchases. • Inflation therefore affects the functions of money greatly. (See Table 33-3 of text)

  10. An Overview of the Consequences of Inflation • Inflation can be looked at in the context of the following factors: • Consumption • Balance of Payments • Investments • Unemployment • The Demand for money • Income Distribution • Savings and Growth (See Text Pgs. 504 to 506)

  11. THE CONSEQUENCES OF INFLATION ON AN ECONOMY • Reduction in purchasing power of individuals. • Reduced standard of living. • Inequalities in the distribution of wealth. • Erosion of the value of money saved. • Possible increase in production and unemployment • Increased demand for higher wages. • Increased in imports if goods are cheaper.

  12. THE CONSEQUENCES OF INFLATION ON AN ECONOMY • Creation of uncertainty about future prices in the investment sector. • Adverse effects in a country’s current account of the balance of payments which may cause deficits

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