Define Inflation: Inflation can….
(Explain each)
Inflation is prices increases as money loses its value.
1) Erode purchasing power:
______________________________________________
______________________________________________
money is less valuiable meaning that you can buy less with it
3 Effects ______________________________________________
of Inflation 2) Erode Income:
Purchasing power is the
______________________________________________
Prices decreases ability to purchase: having a larger income doesnt mean as much because money is
______________________________________________
g________
oods
increases ______________________________________________
worth less therefore having a smaller effect on purchasing power
s_________
ervices
Purchasing 3) Affect Interest Rates on Savings:
Power
______________________________________________
interest rates will hold less value as money is worth less
______________________________________________
Demand- Pull Theory
Summarize: ______________________________________________
Quantity Theory
Summarize: supply is out driven by demand resulting in increase of cost
Cost- Push Theory
prices are Summarize:
proportional to the
existing money
supply increasing the cost of production increases price
4) Rising costs for
products result
in more
3) In response, employees
companies who demanding
2) So ZMX use ZMX higher wages
raises the products raise
price of its their prices
Textbook pgs. products
How does the Wage-
__________
Price Spiral work? 1) ZMX
an increase in
___________________
Causes of , employees
wages results in
___________________ receive a pay
Inflation increased prices
___________________ raise
___________________
Inflation Rates What is a Price Index?
1-3% inflation rates do not Economists compare the price levels of a
usually cause problems in the standard group of goods known as a
economy “market basket” over time using a price
5% + inflation rates make index. A price index produces an average
inflation unpredictable and that is compared with earlier averages to
dangerous gauge how much prices in the “market
100-500% + is known as basket” have changed over time. Individuals
hyperinflation, or an inflation and the government use the information
rate out of control gathered from price indexes to determine
how much money to save or whether or not
to increase the minimum wage. The best
known index is the Consumer Price Index
or CPI, which is computed each month by
How to calculate the CPI and Inflation Rate:
the Bureau of Labor Statistics. Economists
even go a step further and calculate the
Step One: Calculate the prices of your “market basket” to complete
inflation rate, or percentage rate of change
the fictional CPI. (add up the cost of the items in your base year, year
in the price level. How does the BLS
1 and year 2 baskets) What are the totals?
determine the CPI and calculate the
Step Two: Take notice. Did the price of the market basket of goods go
inflation rate?
up or down over the 1 year (2018-19) period? (mark +/-)
Step Three: Calculate the CPI for the 2018 and 2019 market baskets
using this formula:
CPI= price of market basket (for the year you are calculating) X 100 8 Major Market Basket Categories:
Price of base year market basket (2017) Food & Beverages
Step Four: Using this formula, calculate the inflation rate: Housing
CPI (Year 2) – CPI (Year 1) X 100 = Inflation Rate Apparel
CPI (year 1) Transportation
Step Five: Evaluate. According to the interest rate that you Medical Care
calculated, is this sample economy healthy? Recreation
Education &
Communication
Other Goods & Services
Need more help understanding how to calculate the CPI? Go to YOUTUBE:
Macro Unit 2.5- CPI Practice AP Macroeconomics
Think About It!
-.15 1) What were some goods
compared in the market basket?
+200 eggs and cars
___________________________
___________________________
-10
2) What two market basket years
were compared? What was the
+1150 base year?
2018 and 2019 are compared. the
___________________________
+.50 base year was 2017
___________________________
+2
3) What does the final inflation
rate tell you about this fictional
+.25 economy? Is it healthy?
+2 the economy is not healthy
___________________________
because it has an inflation rate
___________________________
17737.74 19102.34 that is higher then 5%
16000
110.86 119.389
Finding the CPI= price of market basket (for the year you are calculating) X 100
price of base year market basket (2017)
Do the math! Calculate
Finding the Inflation Rate= CPI (Year 2) – CPI (Year 1) X 100 the Inflation Rate using
CPI (Year 1) the formula provided.
1) What is the definition of inflation according to the video?
________________________________________________________________________________________
2) Government buys many items on credit. What are some big-ticket items the
government buys on credit?
________________________________________________________________________________________
3) Why would a politician be willing to print more money? Too Much Money
________________________________________________________________________________________ ~Video Activity~
4) During the U.S. “Revolutionary War” how was the supply of continentals increased
by a process called “inflation as an act of war”?
________________________________________________________________________________________
5) What happened to the value of the American continental during the Revolutionary War?
________________________________________________________________________________________
6) Explain what happened to the value of gold and silver during the “Century of Gold”?
________________________________________________________________________________________
7) Why did the German government print more money following the end of WWI? What Watch the video
effect did this have on the value of their money?
and answer the
________________________________________________________________________________________
questions in
8) Did Germany experience hyperinflation (100-500+% inflation rate is known as complete
hyperinflation, or an inflation rate out of control)? Give an example from the video to sentences…
support your answer.
________________________________________________________________________________________
9) Why were Bolivian families trading their cash for electronic goods and menthol rub in the
1980’s?
________________________________________________________________________________________
10) How did hyperinflation affect the cost of soda in Bolivia? Give the specific example Scan the QR Code or go to
from the video. YOUTUBE: Too Much
________________________________________________________________________________________ Money (posted by izzitEDU)
to watch. (or use izzit.org)
What is inflation?
Explain how inflation works using
one of the examples from the
video.
Scan the QR Code or go to
YOUTUBE: Econ Vids for Kids:
Is Inflation Harmful?
What is Inflation? ~A Video Activity~
