Lesson 5: Inflation/Deflation Economics Unit 3 Lesson 5: Inflation/Deflation

What Makes Money Important? 1. It’s a Medium of Exchange. Money is valuable because it is accepted in the buying and selling of goods and services. Money makes trading easier than it would be with barter. 2. It is a Store of Value. Money is a way of storing wealth. If you work today, you can get paid in money and wait to spend it in the future. 3. It is a Measure of Value Money can be used to state how much things are worth. The value of goods and services can be expressed in money prices to allow for easy comparisons

Auction There will be two rounds of auctioning Several valuable items will be auctioned each round Each student has money to bid in each round $1 is worth $10,000 You may pool capital resources (money)

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What Happened? Why did price of the same goods go up the second round of the auction?

What is inflation? Inflation is: Inflation is not: A sustained increase in the average prices of all goods and services in the economy. Can be caused by greater consumer demand (Demand Push) or greater production costs (Cost Push) Usually coincides with an increase in wages (cost of living) Inflation is not: An increase price in one or a few goods or services Supply and demand can impact price but not be due to inflation

Another Auction Take $5 from each student who still has money left Run the auction again What do you notice?

What is deflation? Identified as continuously falling prices/wages for well over a year and is not a decrease price in one or a few goods Is usually caused by a sustained decrease in wages Results in a sustained decrease in the average prices of all goods and services in the economy Is usually accompanied by sustained periods of falling production, unemployment, and limited capital investment (wealth).

Measuring the Relationship between Money Supply and Price MV (Demand)=PQ (Supply) M indicates money supply V indicates velocity of money, or number of times a dollar is spent or circulated in the economy P indicates overall price level of goods and services in the economy Q indicates quantity of goods and service produced in the economy MV= Total Amount of Money Spent by Consumers PQ= Total Amount of Money Received by Sellers

Consumer Price Index Consumer Price Index (CPI) Measurement used to determine inflation and deflation where the prices of over 200 categories of consumer goods and services are accounted throughout the month. Inflation has averaged about 3% a year for the last decade Deflation