Inflation

Inflation

Standard: Understand economic indicators to recognize economic trends and conditions

​Objectives

a.    Remember vocabulary terms and definitions: inflation, inflation rate, deflation, Consumer Price Index, standard of living, targeted inflation rate, and price stability.   

b.    Describe causes of inflation.

c.     Explain how inflation impacts the economy.

d.    Describe the relationship between price stability and inflation.

e.    Explain problems associated with deflation.

f.      Discuss reasons why the inflation rate should be above zero.

g.    Explain how businesses can use the Consumer Price Index.

​Inflation Defined

In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money.

​Inflation rate defined

The rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country.

Multiple Choice

When inflation is high the _______________of the dollar decreases

• cost value

• purchasing power

• importance

• validity

Multiple Choice

What is inflation?

• rise in all prices

• rise in most prices

• rise in some prices

• rise in general prices

Multiple Choice

What is inflation?

• Increase general price level of goods and services

• Increase price level from one private organisation

• Decrease general price level of goods

• Increase general price level of services

Types of inflation

• Cost Push Inflation

• Demand Pull inflation

• Expansion of the Money Supply

• Import Inflation

Cost-Push Inflation

Cost-push inflation occurs when prices rise because production costs increase, such as raw materials and wages. The demand for goods is unchanged while the supply of goods declines due to the higher costs of production. As a result, the added costs of production are passed onto consumers in the form of higher prices for the finished goods.

​Example of Cost push Inflation

If the price oil or natural gas increases, it's going to lead to an increase in gas prices at the pump, or the gas that is needed to heat your home.

​Demand Pull Inflation

Demand-pull inflation can be caused by strong consumer demand for a product or service. When there's a surge in demand for a wide breadth of goods across an economy, their prices tend to increase. While this is not often a concern for short-term imbalances of supply and demand, sustained demand can reverberate in the economy and raise costs for other goods; the result is demand-pull inflation.

​Demand pull inflation

As the demand for a particular good or service increases, the available supply decreases. When fewer items are available, consumers are willing to pay more to obtain the item—as outlined in the economic principle of supply and demand. The result is higher prices due to demand-pull inflation.

Multiple Select

Main features of Inflation are:

• Prices rise continuously over long period of time

• Prices rise at a faster rate

• Rise in prices is same for all goods and services

• Rise in prices is not same for all goods and services

Multiple Choice

What 2 types of inflation are there?

• demand pull and cost push

• demand pull and supply glut

• supply glut and demand side

• supply inflation and demand inflation

Multiple Choice

What causes demand pull inflation?

• rise in price due to a decrease in supply

• a rise in price level due to an increase in consumption

• a rise in price due to an increase in the cost of production

• a decrease in price due to a decrease in supply

Multiple Choice

What causes cost push inflation

• An increase in demand for goods and services

• An increase in supply

• A rise in production costs passed on to consumers

• A fall in the price of imports

Multiple Choice

Which of the following causes of inflation is often described as “too much money chasing too few goods”?

• Demand-pull inflation

• Cost-push inflation

• Demand-push inflation

• Cost-pull inflation

Multiple Choice

What cause of inflation comes from an increase in commodity prices such as oil and wheat, or an increase in wages?

• Cost-push inflation

• Demand-pull inflation

• Price-push inflation

• Supply-pull inflation

• None of the answers