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Published byEmil Benson Modified over 9 years ago
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Inflation
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Consumer Price Index (CPI) A price index determined by measuring the price of a standard group of goods meant to represent the “market basket” of a typical urban consumer Inflation is a general increase in prices. It is ok so long as wages increase with it.
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What are the causes and effects of inflation? Inflation is caused by: - The growth of the money supply - changes in aggregate demand - changes in aggregate supply The effects of inflation are: - decrease in purchasing power - diminishes real income - decrease in savings interest rates
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19962008 Bread, white per pound--- $.85 Eggs per dozen- $1.14 Milk (gallon) - $2.54 $1.35 $2.20 $3.78
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Causes of Inflation Changes in aggregate demand: inflation can occur when demand exceeds existing supplies Changes in aggregate supply: inflation can occur when producers raise prices in order to meet increased costs –Wage increases are the largest single production cost for most companies
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Wage-Price Spiral Increasing wages can lead to a spiral of ever-higher prices because one increase in wages leads to an increase in prices, which leads to wage increases and so on People on fixed-incomes suffer!!!
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INFLATION HURTS The savers : Those who stash away their money (and no invest) will see the value of it diminish with inflation over time
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How to fight inflation? The Worst way to fight inflation is to institute government wage and price controls
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Cost-Push Inflation Inflation that occurs from Increasing costs leading to a decrease in the aggregate supply curve –Causing equilibrium price to increase and equilibrium quantity to decrease –WHITEBOARD FOR EXAMPLE
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