Today’s Warm Up Take out Activity 8.2 from yesterday! Answer in your notes & be ready to share: What is the Misery Index and how is it calculated? What do you think causes inflation?

What is Inflation? During an expansionary phase of the business cycle, the possibility of inflation exists This overall increase in price levels affects households, businesses, and gov’t differently 

Impact on Real Purchasing Power When the inflation rate rises above 3%, real purchasing power in the economy declines for many people. A candy bar cost how much?!?! Back in my day $1.00 could buy me 100 candy bars!!!

What Causes Inflation? Demand-Pull Cost Push Economy is overheated! “Too much money is chasing too few goods.” Incomes are higher than the amount of goods and services available so prices rise Example: Wynn Bucks!!! Costs of productive resources rise, pushing up the cost of production. Producers cut back on the amount they can supply so prices for the final g/s rise

Inflation Creates Winners & Losers Borrowers! g/s received at lower price & paid back in dollars worth less People whose income rises faster than the inflation rate gain People whose assets increase in value faster than the inflation rate

Losers  Savers! People on fixed incomes Creditors Value of savings declines if the interest rate received does not stay ahead of the inflation rate People on fixed incomes Income stays the same while prices rise  Creditors Paid back in dollars that will buy less than when the money was lent

Log on… http://mswynnworldhistory.wikispaces.com Click on Economic Misery & Presidential Election

Compare/Contrast: Cost Push vs. Demand-Pull