 Hey Mr. President; All your congressmen, too, You got me frustrated; And I don't know what to do. I'm trying to make a living; I can't save a cent. It takes all of my money just to eat and pay my rent. I got the blues; Got those inflation blues. You know, I'm not one of those high brows; I'm average Joe to you; I came up eating cornbread, candied yams, and chicken stew. Now you take that paper dollar; It's only that in name; The way that buck has shrunk, it's a lowdown dirty shame. That's why I got the blues; Got those inflation blues. Mr. President, Please cut the price of sugar; I wanna make my coffee sweet; I wanna smear some butter on my bread, and I just got to have my meat. When you start rationing, you really played the game; And things are going up, And up and up and up; And my check remains the same. That's why I got the blues; got those inflation blues.

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1. When quantity demanded exceeds quantity supplies, prices go up and the purchasing power of the dollar goes down. 2. When quantity supplied exceeds quantity demanded, prices fall and purchasing power of the dollar increases.

 DEMAND—Pull  Aggregate demand increases faster than the economy’s productive capacity  Can result from increases in the money supply or increases in the use of credit  “too much money causing too few goods

 COST—PUSH (Producers raise prices to cover higher resource costs)  Producers set prices high enough to cover their costs and make a profit  Supply shocks—events that increase the cost of production—natural disasters, political upheaval, crop failure  Wage/price spiral—higher wages lead to higher prices

 When consumers expect a price increase they tend to spend more now.  As a result, aggregate demand increases, and prices rise.

 Bureau of Labor Statistics  Use price indexes like the CPI (Consumer Price Index) to measure inflation rate

 Measures the price of a “market basket” of goods  Compares price to a base year ( =100)  (CPI year B – CPI year A) divided by CPI year A, then times 100  Low to moderate inflation = % Food, housing, furniture, clothing, transportation, medical, recreation, education, phones, haircuts, tobacco, services, etc.

 ( = 100)  2001 = 177  2002 = % inflation  2003 = %  2004 = %  2005 = %  2006 = %  2007 = %  2008 = %  2009 = %  2010 = %

 Same dollar buys less  Hurts those on a fixed income

 WASHINGTON (AP) -- American families were squeezed last year as their inflation- adjusted weekly wages fell 1.6 percent -- the sharpest drop since well below the 2.7 percent consumer inflation rate. (Washington Times, Jan. 15, 2010)

 As prices increase, interest rates— the price of borrowing money— increase too.  High interest rates can decrease consumer spending  Can double or even triple monthly payments on credit cards and loans

 Put $2000 in a savings account at 5% interest  In 5 years it equals $2500  If inflation were 7%, you would have actually lost money  You would need $2700 to break even—to having buying power equal to the $2000 you had 5 years ago.

 Inflation increases the cost of inputs.

“Paper money eventually returns to its intrinsic value— zero.” Voltaire— ( )