Inflation Stable Prices

1. Inflation & Stable Prices Inflation An increase in the general level of prices. Hyperinflation Extremely rapid increases in the general level of prices. Consequences of Inflation Intensifies scarcity when income does not rise as quickly as prices. Penalizes some groups, such as savers receiving low interest rates. Changes the value of assets. Politically and socially destabilizing.

2. Nominal Income (Money) Income measures in terms of current currencies. Real Income Income measured in terms of the goods and services that can be purchased with a particular amount of money income. Cost of Living Adjustments (COLAs) Arrangement whereby an individual�s wages automatically increase with inflation. Inflation & Stable Prices

3. Fu�s Tropical Paradise

4. One Week Activity Day Fish Corn Total (Real) Total (Nominal) Monday 1 2 1 fish 2 corns 4 shells Tuesday 1 2 1 fish 2 corns 4 shells Wednesday 1 2 1 fish 2 corns 4 shells Thursday 1 2 1 fish 2 corns 4 shells Friday 1 2 1 fish 2 corns 4 shells Saturday 0 0 0 0 Sunday 0 0 0 0 Total 5 10 5 fishes 10 corns 20 shells

5. One Week ActivityGeneral level of Price goes up Day Fish Corn Total (Real) Total (Nominal) Monday 1 2 1 fish 2 corns 8 shells Tuesday 1 2 1 fish 2 corns 8 shells Wednesday 1 2 1 fish 2 corns 8 shells Thursday 1 2 1 fish 2 corns 8 shells Friday 1 2 1 fish 2 corns 8 shells Saturday 0 0 0 0 Sunday 0 0 0 0 Total 5 10 5 fishes 10 corns 40 shells

6. Measures of Production (cont.) Production Overview

7. Cost of Living Adjustments (cont.) Inflation & Stable Prices

8. Inflation and the Interest Rate Interest Rate The price of money. Determines the return to savers and lenders of money, and the cost to borrowers. The Real Rate of Interest Nominal, or stated, rate of interest minus the inflation rate. Nominal interest rate adjusted for inflation. Wealth and the Interest Rate Wealth Measure of the value of tangible assets. Includes such items as real estate and corporate securities. Inflation & Stable Prices

9. Social and Political Consequences of Inflation Inflation & Stable Prices

10. Causes of Inflationary Pressure Demand-Pull Inflation Pressure on prices from the buyers� side of the market. Tends to occur when spending is greater than the productive capability of the economy, and when an economy is close to or at full employment. Cost-Push Inflation Pressure on prices from the sellers� side of the market, particularly from increases in the costs of production. Occurs due to increased costs of labor, raw materials, fuels, machinery, borrowing, and even attempts to increase profit. Role of Expectations Our expectations about inflation can cause inflation to occur. Inflation & Stable Prices

11. Measures of Inflation Price Index Measures changes in the price of an item or a group of items using a percentage scale. Consumer price index Producer price index GDP price index Constructing a Price Index Base Year Year against which prices in other years are compared in a price index. Inflation & Stable Prices

12. Constructing a Price Index (cont.) Inflation & Stable Prices

13. Consumer Price Index Measures changes in the prices of goods and services that consumers typically purchase. Inflation & Stable Prices

14. Consumer Price Index (cont.) Inflation & Stable Prices

15. Other Price Indexes Producer Price Index (PPI) Measures changes in the prices of goods that businesses buy, either for further processing or for sale to a consumer. GDP Price Index Price index used when calculating price changes for the entire economy. Inflation & Stable Prices

16. Deflation and Disinflation Deflation Sustained decrease in the general level of prices. Disinflation Slowing of the inflation rate. Deflation & Disinflation