Time to award some candy!!! Make your predictions: 1.How much did a gallon of gas cost in 1976? – $.67 2.How much did a two liter bottle of pop cost in 1995? – $1 3.How much did a pound of bananas cost in 1980? – $.34

Inflation

Basics Inflation – General rise in prices over time – De-valuing of currency One dollar today will not buy as much as one dollar did 20 years ago

Causes Increase in supply of money – Printing of money causes supply to go up

Causes Increase in demand for products – Causes prices to go up

Causes Increase in input costs – Energy costs, labor costs, natural resources, etc Spiraling Theory – Inflation causes prices for goods and services to go up, so… – Workers demand more money, so… – Employers raise prices for goods and services, so… – Workers demand more money, so…. – Employers raise prices for goods and services, so…

How It’s Measured Price Index – Comparison of prices between two points in time Cost of milk today vs. cost of milk in 1983 – CPI (Consumer Price Index) Most common price index used to measure inflation Compares the cost of hundreds of basic items (food, gas, household products, etc)

What does it tell us? Too much inflation = economy growing too fast – Prices are going to high to fast for people to keep up – There’s too much money in the economy Negative inflation (deflation) = economy growing too slow – Prices are going too low to fast for companies to make profits Ideal inflation = 2 to 3%

Quick Review 1.How does inflation affect the value of currency? – De-values it 2.How do we measure inflation? – Use price indices (CPI) 3.How can we use inflation to determine the health of the economy? – Too much inflation = growing too fast; negative inflation = growing too slow – Ideal is 2-3% inflation