Inflation

Inflation General increase in prices & a decline in the purchasing power of your money Based on just this definition let’s see who is going to be a Queen for a Day

2 types of inflation Anticipated inflation A level of inflation that people expect over time Built into economic decisions Ex: you need a new car eventually, but you know the prices on cars always will increase You either save more for a future purchase or you purchase now to avoid further inflation Unanticipated inflation Price levels increase without knowing they have until after the fact Harms the economy Decreased money protection

Anticipated inflation Economic activity according to anticipated inflation Boot-leather costs: running around trying to find the best deal for their money Distortion of incentives: a shift in incentives according to inflation Increase of dollar returns on investments Uncertainty of who and when policy makers will respond to higher levels of inflation

Unanticipated Inflation What are some economic issues with unanticipated inflation? Ultimately, unanticipated inflation is a huge issue since people cannot adjust earnings and expenditures based on the level of inflation

Nominal vs Real Inflation Inflation in comparison to other goods or years Comparisons are done using the Consumer Price Index Consumer Price Index Method that compares the total cost of fixed prices Index number = Current year cost X 100 Base year cost Multiplying by 100 converts our numbers to something actually comparable.

Nominal vs Real Inflation Nominal inflation Comparing market values without adjusting for inflation Comparing costs based on the price at the time Examples Price of a Coke in 1950: $0.05 Price of a Coke in 2016: $1.25 Price of gas (gallon) in 1930: $0.30 Price of gas (gallon) in 2016: $2.40 Price of personal computer 1980: $8995 Price of personal computer 2016: $379

Island issues You and your group are stranded on a remote island. You are probably going to be there for the rest of forever so you might as well make the best of it. You and your group members will come up with the best economy and society for your new island. Each member will receive a role, to engage with the economy building. These will be recorded. You and your group will answer a set of questions to facilitate building an economy; these answers will be recorded and turned in by the end of class, as a group. You will also have an independent reflection, so make sure to stay engaged so that you know what to say when the reflection roles around. Ask questions when you have them!