Inflation and Stagflation

1. Inflation and Stagflation

2. What is inflation? Define inflation. How does it affect the economy? • a rise in the general price level. • It causes rising prices for goods and services. • It reduces purchasing power for individuals. • It causes money to lose its value over time.

3. What is Deflation? Define deflation. How does it affect the economy? • a reduction of the general price levels . • It causes falling prices. • It usually accompanies falling demand and economic problems. • It increases the value of money.

4. What is Disinflation? • Disinflation means that the rate of inflation is declining. • It just means that there is a lower rate of inflation than the year before. • It is not a bad thing. It is different than deflation.

5. What is inflation rate? • The inflation rate is the annual rate at which prices increase. It is measured using the following formula. • Typical rate of inflation in the United States is about 2.5% every year.

6. What is inflation? Compare creeping inflation, galloping inflation, and hyperinflation. • Creeping inflation: a slow rate of inflation , in the range of 1-3% a year • Galloping inflation: an intense form of inflation that can go as high as 100-300% • Hyperinflation: inflation in the range of 500% and above

7. What is a Price Index A statistical series that can be used to measure changes in prices over time. • Consumer Price Index • Producer Price Index

8. Price Index Consumer Price Index (CPI) Index that reports on price changes for about 90,000 items in 364 categories. It is calculated by the US Bureau of Labor Statistics. Everything larger than 0% shows an increase in prices over the year.

9. Price Index Producer Price Index • Index that measures price changes paid by domestic producers for their inputs. • This index tracks changes in prices received by domestic producers of about 3,000 commodities. • Its base year is 1982.

10. Price Index Implicit GDP Price Deflator • Index of average level of prices for all goods and services in the economy, computed quarterly • has a base year of 1992. • It is used to show how consumer prices change over al long time.

11. Nominal and Real GDP What is the difference between nominal and real measurements? The main difference between nominal and real values is that real values are adjusted for inflation and price changes, while nominal values do not account for outside factors.

12. Nominal and Real GDP Define nominal GDP and real GDP. Nominal GDP: Gross domestic product measured using prices that were current at the time of measurement. Real GDP: Gross domestic product measured using constant prices . GDP in all years is calculated on the basis of prices in a base year.

13. Nominal and Real GDP Compare the two tables. Discuss observations you made about the nominal GDP and real GDP.

14. Nominal and Real GDP Compare the two tables. Discuss observations you made about the nominal GDP and real GDP. **Nominal GDP appears to be higher than real GDP

15. Types of Inflation Demand-Pull Inflation • Demand-pull inflation occurs because of increasing demand. As demand increases, prices increase. Occurs when economic conditions are strong. • Example: Consumers have more funds available to buy new cars. Dealers raise prices to match demand. Demand increases for goods needed to make cars. The prices of these goods increase. • Causes: • A growing economy • Government spending • More money in the system

16. Cost-Push Inflation • Caused by increased production costs. • Companies raise prices to pass on these costs to consumers. Rising prices cause inflation over time. • Rising gas prices increase transportation costs. Companies have to pay more to transport goods. Consumers then pay higher prices for goods. • Causes: • Natural disasters • Worker Strikes • Sudden change in government • Changes in laws and regulations

17. Hyperinflation • Occurs when prices rises extremely quickly. • Money can become worthless. • The printing of more money results in even faster inflation. • Example: Money and bonds are printed to pay for a war. The value of the currency decreases. A decrease in production causes a shortage of goods. Prices increase rapidly. Money becomes worthless. • Causes: • Economic depression • Wars • Extreme government imposed price and wage controls

18. Causes of Inflation Demand-Pull Theory All parts of the economy try to buy more goods and services than can be produced. Greater demand pulls prices up.

19. Causes of Inflation Cost-Push Theory Increase in input costs drive up cost of products for producers which eventually leads to an increase in prices.

20. Causes of Inflation Government Deficit • Result of demand from government Deficit spending. • Government spends more money than it takes in. • Basically, a demand-pull with the government as the main cause.

21. Causes of Inflation Wage-Price Spiral • Rising wages and prices force each other to keep going up. • Workers demand higher wages when prices rise. • Producers raise prices to make up for the increased spending on wages.

22. Causes of Inflation Excess Supply of Money • People spend the money when the money supply grows faster than real GDP. • Extra spending creates greater demand. • Demand pushes up prices.

23. Consequences of Inflation The Dollar Buys Less • Prices of goods increases • consumers are able to purchase less for their money.

24. Consequences of Inflation Spending Habits Change • Interest rates are adjusted to account for inflation. • People have trouble borrowing money for large items such as houses and automobiles when interest rates increase.

25. Consequences of Inflation Risky Investments Some investors choose to invest in things like gold, gems, and artwork whose values are expected to rises as prices rise in hopes that the prices of those items rise at higher rates than inflation rates.

26. Consequences of Inflation Income Distribution Changes • Inflation helps people who owe money because they can repay loans with inflated dollars. • These dollars have less purchasing power than the dollars originally borrowed.

27. Stagflation • A combination of stagnant economic growth and inflation. • Occurs when an economy is experiencing: • a damaging rate of inflation • a low level of production of goods and services • a high level of unemployment

28. Stagflation Dangers of Stagflation • Stagflation causes people to worry about becoming unemployed, causing less spending. • It causes worry about inflation, causing less spending. • People spend less money, causing an economic slowdown.

29. Stagflation Effects of Stagflation. • Stagflation can cause a reduction in the value of currency. • Production and GDP may decrease. • Trade with other economies may decrease.