1. Winston Churchill High School
Inflation
AP Macroeconomics
David Mayer
Winston Churchill High School
North East ISD
San Antonio, TX ]

2. Inflation… what is it? An increase in the economy’s price level
The price level is the weighted average of prices
A decrease in money’s purchasing power

3. What causes inflation 2 immediate causes (what starts it)
Demand-pull
Cost-push
Ultimate cause (what sustains it)
Too much money chasing too few goods
This can lead to hyperinflation
The wage-price spiral

4. How’s inflation measured
Consumer Price Index (CPI)
Used to measure consumer inflation
Market basket approach
Quick, efficient
Ignores consumer substitution, quality changes
GDP deflator
Measures entire economy’s inflation
Includes everything
Used to deflate nominal gdp

5. 2 ways inflation is reported
CPI Headline inflation
Includes entire CPI market basket
CPI Core inflation
Excludes food and energy because they are volatile

6. Who does inflation effect?
Everybody
Who wins?
Those with large debt
Those who borrowed at low fixed interest rates
Those who make fixed payments
Who loses?
Those with large cash savings
Those who lent at low fixed interest rates
Those receiving fixed payments

7. Expectations Expecting inflation causes inflation
Consumers demand more
Producers supply less
The role of the central bank
Control actual inflation by controlling expected inflation
The importance of credibility

8. Disinflation and Deflation
Decrease in the inflation rate
Going from 7% inflation to 2% inflation
Disinflation is good for the economy
Referred to as price stability
Deflation
Negative inflation rate
prices falling
Deflation is bad for the economy
Creates perverse incentive to delay spending on durable goods and capital investments