Transcript Effects of Inflation - Oconee County Schools

 In the graph, the year with the highest unemployment rate
is 1983. What was the approximate unemployment rate in
that year?
A. 5.9%
B. 8.5%
C. 9.6%
D. 10.2%
Effects of Inflation
Inflation
 Inflation
 General rise in the price level
 Deflation
 Fall in the price level (below a CPI of 100)
 Disinflation
 A decrease in inflation from the previous price level
 The inflation rate measures the percentage change in
prices.

Rates from 1-3% are considered low to moderate (creeping v.
galloping).
Hyperinflation
 Hyperinflation
 Massive rise in price level
 E.g., Germany after WWI
1914: 4.2 marks=$1
 Nov. 1, 1923: 130B marks=$1
 Nov. 30, 1923: 4.2T marks=$1
 In other words, an item that cost 1 mark in 1914 cost 1 trillion
marks in 1923

Hyperinflation in Zimbabwe
Large govt budget deficits
led to the creation of
large quantities of money
and high inflation rates.
date
Zim$ per US$
Aug 2007
245
Apr 2008
29,401
May 2008
207,209,688
June 2008
4,470,828,401
July 2008
26,421,447,043
Feb 2009
37,410,030
Sept 2009
355
Sign posted in
public restroom
Stagflation
 Stagflation
 a period of stagnant growth in the economy and rapid inflation
 occurred in the 1970s in the U.S.
 The problem is the by trying to fix one problem, you make the
other problem worse
Focusing on increasing output, you shift the AD curve right, but
also increases inflation
 Focusing on decreasing inflation, you shift the AD curve left, but
this also decreases output (economic growth)


The Fed Chairman in the 1970s period of stagflation decided to
focus on inflation, which eventually resulted in a recession
(however, many say things would have been much worse had
he not worked in the manner that he did).
Effects of Inflation
Decreases Purchasing Power
1.

especially hurts those on fixed incomes (often why there are Cost of
Living Adjustments)
Decreased Value of Real Wages
2.

wages fail to keep pace with rising prices
Increased Interest Rates
3.

as prices increase, so do interest rates; this decreases consumer
spending
Decreased Saving and Investing
4.

inflation eats up savings b/c interest is typically at a lower rate than
inflation
Increased Production Costs
5.

causes rise in prices; however, businesses benefit from bonds with
interest rates lower than inflation b/c they end up paying back less in
the end (borrowers benefit from inflation, while lenders are hurt by it)
What can we do to stop inflation?
 The answer is to restrict the money supply. It has the
largest effect on inflation

“too much money chasing too few goods”
Video—“Too Much Money”
Royalty for a Day
 I need 12 volunteers to act out these scenarios
 After they read the scenario, the audience will:
Give a thumbs up and say “Yay, inflation!” if they are helped by
inflation
 Give a thumbs down and say “Boo, inflation!” if they are hurt by
inflation
