Econ CH13 Inflation

Inflation

Chapter 13

Multiple Choice

What is inflation?

• Inflation is the rate at which the general level of prices for goods and services is rising.
• Inflation is the measure of how much the value of money has increased over time.
• Inflation is the term used to describe the stability of prices in an economy.
• Inflation is the rate at which the general level of prices for goods and services is decreasing.

Multiple Choice

What historical example is given in the video to illustrate hyperinflation?

• American Civil War
• Russian Revolution
• French Revolution
• Bolivia during the 1980s

Multiple Choice

What was the consequence of the Continental Congress printing too much money?

• Price of goods decreased

• The British economy was destabilized

• The economy stabilized

• The value of the continental currency plummeted

Multiple Choice

What did the video imply is necessary to prevent inflation?

• printing more money

• Government spending

• borrowing more money

• exercising control and fiscal responsibility

❖The Effects of Rising Prices

➢Inflation

■a general rise in prices

➢Purchasing power

■the ability to purchase goods and

services

■inflation lowers purchasing power

Inflation

❖Price Indexes

➢A measurement that shows how

prices change over time

➢Using price indexes

■consumers and government use

them to make economic decisions

Multiple Choice

What are "price indexes"

• Geographical coordinates of price variations
• Statistical measures tracking changes in prices of goods and services over time.
• Historical records of product prices
• Predictions of future price trends

➢The Consumer Price Index (CPI)

■reports on price changes for 90,000

items in 364 categories

■that is called a “market basket”

●a representative collection of goods

and services

■base year—a year used for comparison

Multiple Choice

What does the Consumer Price Index (CPI) do?

• Measures the average change in prices paid by urban consumers for a market basket of goods and services.
• Calculates the total income of consumers in urban areas.
• Measures the average change in prices paid by rural consumers for a market basket of goods and services.
• Estimates the unemployment rate among urban consumers.

➢Price indexes and the inflation rate

■used to calculate the inflation rate

➢Determining the CPI

■example:

2000 (market basket)=$120

1990 (market basket)=$100 (base year)
inflation rate

= 20% (over ten years)

➢Types of inflation

■core inflation rate

●inflation rate excluding food and

energy prices

■Hyperinflation

●inflation that is out of control

Multiple Choice

What is "hyperinflation"

• Hyperinflation is a rapid and excessive increase in the general price level of an economy.
• Hyperinflation is a slow and steady decrease in the general price level of an economy.
• Hyperinflation is a term used to describe stable economic conditions.
• Hyperinflation is a situation where prices remain constant over time.

➢Causes of Inflation

■The quantity theory

●too much money in the economy

causes inflation

●“too many dollars chasing too

few goods”

●depends on the total money

supply in the economy

➢Demand-pull theory

■when demand for goods and services

exceed existing supplies, forcing prices to
go up

■shortages are important

➢Cost-push theory

■producers raise prices to meet increasing

costs

Multiple Choice

What is the "demand-pull" theory?

• Inflation caused by an increase in demand for goods and services
• Inflation caused by government intervention
• Inflation caused by changes in supply
• Inflation caused by a decrease in demand for goods and services

Multiple Choice

What is the "cost-push" theory?

• Inflation caused by a decrease in production costs
• Inflation caused by an increase in consumer demand
• Inflation caused by a decrease in interest rates
• Inflation caused by an increase in production costs

❖Effects of Inflation

➢Purchasing power decreases
➢Income

■if income keeps up with inflation,

real wages don’t go down

■people on fixed incomes can be hit

hard

Multiple Choice

What group of people are hit hardest with a rise in inflation?

• Retirees with high savings
• Individuals with high incomes
• Individuals on fixed incomes or with low wages
• Young adults with no savings

➢Interest rates

■inflation eats into interest rates for

investors and lenders

➢Deflation

■a general lowering of prices
■that rarely happens