Unemployment Practice On Friday you were given an unemployment practice sheet (there were 2 sides) You need to complete that practice and turn it in I am going to give you 10 minutes to do so before we move on

Annual Inflation Rate- Time for Prices to Double- Goal #3 LIMIT INFLATION Country and Time- Zimbabwe, 2008 Annual Inflation Rate- 79,600,000,000% Time for Prices to Double- 24.7 hours Copyright ACDC Leadership 2015

What is Inflation? Inflation is rising general level of prices and it reduces the “purchasing power” of money Examples: It takes $2 to buy what $1 bought in 1987 It takes $6 to buy what $1 bought in 1970 It takes $24 to buy what $1 bought in 1913 When inflation occurs, each dollar of income will buy fewer goods than before Copyright ACDC Leadership 2015

How is inflation measured? The government tracks the prices of specific “market baskets” that include the same goods and services. There are two ways to look at inflation over time: The Inflation Rate- The percent change in prices from year to year Price Indices- Index numbers assigned to each year that show how prices have changed relative to a specific base year. Examples: The U.S. inflation rate in 2014 was 0.8%. The Consumer Price Index for 2014 was 235 (base year 1982). This means that prices have increased 135% since 1982. Copyright ACDC Leadership 2015

Consumer Price Index (CPI) The most commonly used measurement of inflation for consumers is the Consumer Price Index (CPI) Here is how it works: The base year is given an index of 100 To compare, each year is given an index # as well = Price of market basket in base year x 100 CPI Price of market basket 1997 Market Basket: Movie is $6 & Pizza is $14 Total = $20 (Index of Base Year = 100) 2009 Market Basket: Movie is $8 & Pizza is $17 Total = $25 (Index of ) 125 This means inflation increased 25% b/w ’97 & ‘09 Items that cost $100 in ’97 cost $125 in ‘09 Copyright ACDC Leadership 2015

Consumer Price Index (CPI) Calculate CPI using the following information 2000 is the Base year Year Market Basket CPI 2000 $50 2002 $75 2004 $85 2006 $100 2008 $120 2010 $115 2015 $135 100 150 170 200 240 230 270 Copyright ACDC Leadership 2015

Who cares about CPI? CPI can be used to calculate the inflation rate from one year to the next Understanding how prices have changed from one year to the next, helps us have a better understanding of the health of our economy (we will see why in a few minutes) Copyright ACDC Leadership 2015

Practice Complete just the first side of the handout, the side that says constructing a Price Index

Three Causes of Inflation Copyright ACDC Leadership 2015

Higher production costs increase prices 3 Causes of Inflation The Government Prints TOO MUCH Money You get too many dollars chasing too few goods 2. Demand- Pull Inflation DEMAND PULLS UP PRICES!!! 3. Cost-Push Inflation Higher production costs increase prices Copyright ACDC Leadership 2015

The Wage-Price Spiral A Perpetual Process: 1.Workers demand raises 2.Owners increase prices to pay for raises 3. High prices cause workers to demand higher raises 4. Owners increase prices to pay for higher raises

What is the main problem with using GDP as a measure of Economic Growth? We are tracking how much we spend to show how much our production is increasing. If prices change from year to year, how do we know if our economy is actually growing? Copyright ACDC Leadership 2015

Inflation and GDP To calculate Real GDP: Nominal GDP- GDP that is expressed in the current year’s dollar value Real GDP- GDP that has been adjusted for inflation to show the impact of changes in price level To calculate Real GDP: Real GDP= (Nominal GDP/Price Index) X 100 Copyright ACDC Leadership 2015

But inflation doesn’t effect everyone equally. Identify which people are helped and which are hurt by unanticipated inflation A man who lent out $500 to his friend in 1960 and gets paid back in 2015. A tenant who is charged $850 rent each year. An elderly couple living off fixed retirement payments of $2000 a month A man that borrowed $1,000 in 1995 and paid it back in 2014. A women who saved $500 in 1950 by putting it under her mattress Copyright ACDC Leadership 2015

Effects of Unanticipated Inflation Hurt by Inflation Helped by Inflation Lenders-People who lend money (at fixed interest rates) People with fixed incomes Savers Borrowers-People who borrow money A business where the price of the product increases faster than the price of resources Nominal Wage- Wage measured by dollars rather than purchasing power Real Wage- Wage adjusted for inflation If there is inflation, you must ask your boss for a raise Copyright ACDC Leadership 2015

Complete side 2 of the handout Practice Complete side 2 of the handout

The national economy goes up and down like a roller coaster over time The Business Cycle The national economy goes up and down like a roller coaster over time Real GDP Inflation Unemployment Peak Real GDP Trough Full Employment Recession (Contraction) Recovery (Expansion) Time A recession is 6 month period of decline in Real GDP. (If really bad…then depression) Copyright ACDC Leadership 2015

Ticket out the door In what ways does a high inflation rate hurt an economy?