1. the effects of inflation and deflation on different groups

2. Scary! The dollar has lost 56% of it’s value since 1992. Or, a dollar today will buy the same amount of stuff as $0.64 would buy in 1992. What has happened t the value of our money?

4. From year to year, a dollar then vs. a dollar now.

5. Inflation Inflation: P, $ value Deflation: P, $ value Stagflation: recession + inflation at same time. For the last 50 years, the U.S. has had an avg. inflation rate of 4% /yr.

7. So let’s say You get a raise of 5% this year. But inflation was 5% this year. Your nominal pay rose. What happened to your PURCHASING POWER??? IT STAYED THE SAME

8. Stories of extreme inflation Note those who are helped, and those who are hurt.

9. Story Time Once upon a time in Burgerland… There were only four jobs: –Beefers (cowboys) –Bakers –Burger store managers –Bankers And only one product… BURGERS.

10. For as long as anyone can remember… The price of a burger has been $1. All of the burger joints voluntarily charge $1.

11. Bill the baker wants to expand his business So he borrows –$10 from Brenda the banker, –at 20% simple interest (fixed rate), –to be paid back in one year. That’s $12! What is Brenda’s profit? How many burgers will Brenda be able to buy with her profits? (All of the burger joints voluntarily charge $1.)

12. But, before Bill is due to pay Brenda… The burger store managers (Bruce, Belinda, Barry, and Bedelia) unexpectedly raise their prices from $1 to $2 a burger!! Who is hurt by this change of events? Who is helped? How could Brenda have kept from getting hurt?

13. If Brenda had charged 20% interest PLUS the rate of inflation (called an adjustable rate loan) She would have come out better. Prices doubled. That’s 100% inflation. A loan of $10, paid back plus 120% interest would be $22

14. Unexpected Inflation Hurts: –lenders at fixed rates –savers at fixed rates –fixed-income recipients Benefits: –borrowers at fixed rates

15. Reminders/Hints A bond is a loan. –If I buy a bond from Coca-Cola, I’m loaning them $. –They sold me a bond, so they’re borrowing from me. Dividends are profits paid to stockholders. When prices rise, dividends rise. Income tax is a percentage of your income. –When prices rise, incomes rise.

16. Causes of Inflation Increase in money supply (MV=PQ) War More demand

17. Constructing a Price Index Inflation can distort GDP from year to year. A price index measures P changes.

18. Select goods & services for a “market basket.” Add the price of each of these goods, to get the “base-year market basket price.” Find the market basket price at regular intervals (monthly, yearly, etc.).

19. Math Review Percent Change the formula: [(new-old)/old] X 100 so if something increases from 5 to 7, the percent change is [(7-5)/5] = 0.4 = 40%

20. Constructing a Price Index- Continued Price index = (selected basket price/ base yr. basket price)X100 The base-year price index always = 100! Inflation = % change in price index, [(new- old)/old]

21. Inflation between ‘ 84 & ‘ 98: (163-100)/100 = 0.63 = 63% Inflation between ‘ 98 & ‘ 03: (183.7-163)/163=0.13=13%

22. Prices in 1999 Prices in 2009 Peanut butter (lb.)- $1.77 White flour (lb.)- $0.30 White bread (lb.)- $0.87 Chocolate chip Cookies (lb.)- $2.61 Ground beef (lb.)- $1.38 Pork chops, center cut, bone-in, per lb.- $2.95 Bologna, all beef or mixed, per lb.- $2.41 Chicken breast, bone-in, per lb.- $2.07 Cheddar cheese, natural, per lb.- $3.75 Apples, red delicious, per lb.- $0.86 Bananas, per lb.- $0.49 Tomatoes, per lb.- $1.90 Lettuce, iceberg, per lb.- $0.65 Beans, dried, any type, all sizes, per lb.- $0.69 Coffee, 100%, ground roast, all sizes, per lb.- $3.44 Average electric bill per month- $84 Gasoline, unleaded, per gallon/3.785 liters- $0.97 Movie ticket- $5.06 US postage stamp- $0.33 Bacon (lb.)- $2.59 Dozen eggs- $0.89 Average rent/housing payment per month- $645.00 Peanut butter (lb.)- $2.14 White flour (lb.)- $0.52 White bread (lb.)- $1.38 Chocolate chip Cookies (lb.)- $3.11 Ground beef (lb.)- $2.36 Pork chops, center cut, bone-in, per lb.- $3.39 Bologna, all beef or mixed, per lb.- $3.11 Chicken breast, bone-in, per lb.- $2.46 Cheddar cheese, natural, per lb.- $5.01 Apples, red delicious, per lb.- $1.23 Bananas, per lb.- $0.63 Tomatoes, per lb.- $1.66 Lettuce, iceberg, per lb.- $0.94 Beans, dried, any type, all sizes, per lb.- $1.40 Coffee, 100%, ground roast, all sizes, per lb.- $3.68 Average electric bill per month- $126 Gasoline, unleaded, per gallon/3.785 liters- $1.79 Movie ticket- $7.50 US postage stamp- $0.42 Bacon (lb.)- $3.22 Dozen eggs- $1.37 Average rent/housing payment per month- $780.00

23. Major Price Indexes Consumer Price Index (CPI)-90,000 items in 364 categories. Implicit GDP Price Deflator- all goods/services. Base year 1996.

24. Does Government Spending affect the CPI??? Lets take a look at Government Debt and deficits and see if we see a correlation.

27. I. Real GDP GDP adjusted for inflation. Real GDP= [ GDP from year Y/(price index from year Y) ] X100 This formula sets dollars equal to base year.

28. I. Real GDP Listen: If GDP in 2003 was $10.6 trillion, and the GDP deflator was 111.9, what was the Real GDP? [ $10.6 trillion/111.9 ] X100= $9.5 trillion $9.5 trillion is 2003 GDP measured in 1996 prices.

29. Causes of Inflation Demand-pull inflation Cost-push inflation - during stagflation Growth in money supply. Wage-price spiral - higher Ps, then higher wages, then higher Ps...

30. Inflationland In Inflationland, they have inflation at the relatively high rate of 7% a year. The inflation rate is always 7%. Banks expect inflation to stay at 7%, and make decisions accordingly. Businesses give all workers a 7% raise every year. The government raises taxes 7% every year. Who does inflation hurt in this country????

31. The oil crisis of 1973 caused stagflation. High oil prices caused a recession and inflation at the same time. High inflation + falling real GDP = STAGFLATION

32. Questions?