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Inflation and Recession. Resource Network Written By Melissa Snyder and Frank Flanders Ed.D. Consumer Awareness Unit Two Consumer Services. Objective. Students will understand the difference between inflation and recession.
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Inflation and Recession Resource Network Written By Melissa Snyder and Frank Flanders Ed.D. Consumer Awareness Unit Two Consumer Services
Objective • Students will understand the difference between inflation and recession. • Students will be able to identify inflation and recession as it relates to consumers.
Inflation • Inflation – An increase in the average level of prices of goods and services • Caused By: • Supply • Demand • Energy Cost Increases • Natural disasters
Problems Caused By Inflation • A. UNEVENESS • Inflation produces uneven increases in the prices of products. • In periods of inflation it is possible of have some products decrease in price, others increase slowly, while others increase quickly. • Some consumers are hurt worse than others. • Buyers of gasoline are hit worse than buyers of DVD’s and computers. • People with fixed incomes will see their income fall at the same rate as inflation rises.
Problems Caused By Inflation…….cont • B. UNCERTAINTY • Lenders lend money to earn a profit. • To earn a profit, the interest they charge must cover all costs, and be higher than the rate of inflation. • When lenders lend money, they have an expected rate of inflation at the time of the loan. • This expected rate of inflation is based on current rate of inflation, plus a guess about the future • If lenders guess right about inflation, they earn a profit. • If lenders guess wrong, they lose money.
Negative Inflation Impacts • Cost-push inflation • Hoarding • Hyperinflation
Positive Inflation Impacts • Labor-market adjustments • Debt relief • Room to maneuver
Recession • A recession is a business cycle contraction, a general slowdown in economic activity. • Employment, investment spending, household incomes, business profits and inflation all fall during recessions. • Bankruptcies and the unemployment rate rise. • Recessions are generally believed to be caused by a widespread drop in spending.
Impacts of Recession • Unemployment • Business • Social Effects
Unemployment • Unemployment • The full impact of a recession on employment may not be felt for several quarters.
Business • Business • Productivity tends to fall in the early stages of a recession, then rises again as weaker firms close. • The variation in profitability between firms rises sharply.
Social Effects • Social effects • The living standards of people dependent on wages and salaries are more affected by recessions than those who rely on fixed incomes. • The loss of a job is known to have a negative impact on the stability of families, and individuals' health and well-being.