1. Inflation CHAPTER 13 SECTION 2

2. The Effects of Rising Prices  Inflation  A general increase in prices across an economy  Purchasing Power  The ability to purchase goods and services

3. Price Indexes  Price Index  A measurement that shows how the average price of a standard group of goods changes over time  CPI – Consumer Price Index  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 rate  The percentage rate of change in the price level over time

4. Price Indexes  Determining the CPI  CPI = (updated cost/base period cost) X 100  Types of Inflation  Core inflation rate  The rate of inflation excluding the effects of food and energy prices  Hyperinflation  Out of control inflation

5. Causes of Inflation  Growth of Money Supply (M2)  Changes in Aggregate Demand (graph)  Changes in Aggregate Supply (graph)

6. Effects of Inflation  Purchasing Power  Rising inflation = falling PP without increase in income  Income  Fixed income – income that does not increase even when prices go up  Interest Rates  Rising inflation decreases the true amount on interest one earns on an investment