Inflation and the Value of Money

Inflation and the Value of Money

• What habits drive consumer spending?• How do evolving attitudes change spending habits?

Inflation and the Value of Money

• Inflation is an increase in the general level of prices for goods and services.• http://data.bls.gov/cgi-bin/surveymost?ap• Consumer Price Index (CPI) – list of goods and services that are

commonly bought by consumers.• http://data.bls.gov/cgi-bin/cpicalc.pl• Minimum Wage• http://www.infoplease.com/ipa/A0774473.html

Inflation and the Value of Money

• Inflation vs. Purchasing Power• COLA – Cost-of-living adjustments; pay increases from their

employers to keep pace with inflation.http://www.usinflationcalculator.com/inflation/current-inflation-rates/

Disinflation – prices are rising, but the rate of increase is slowing

Reflation occurs when high prices are lowered due to deceased demand, but then are restored to the previous high level.

Inflation and the Value of Money

• What is Reflation? Can you provide an example?

• What is Purchasing Power? Has it gone up or down in the last ten years?

• Question: Your boss tells you that you’re going to receive a 3.1% COLA raise? Are you happy? Why are why not?

Inflation and the Value of Money

• Purchasing power (sometimes retroactively called adjusted for inflation) is the number of goods or services that can be purchased with a unit of currency.

Inflation and the Value of Money

• Hyperinflation – When prices are rising so rapidly they are out of control

Examples of hyperinflation• By late 1923, the Weimar Republic of Germany was issuing two-trillion Mark

banknotes and postage stamps with a face value of fifty billion Mark. The highest value banknote issued by the Weimar government's Reichsbank had a face value of 100 trillion Mark (100,000,000,000,000; 100 million million).[17]

[18] At the height of the inflation, one US dollar was worth 4 trillion German marks. One of the firms printing these notes submitted an invoice for the work to the Reichsbank for 32,776,899,763,734,490,417.05 (3.28 × 1019, or 33 quintillion) Marks.[19]

Examples of hyperinflation

• The Post-World War II hyperinflation of Hungary held the record for the most extreme monthly inflation rate ever — 41,900,000,000,000,000% (4.19 × 1016% or 41.9 quadrillion percent) for July 1946, amounting to prices doubling every 15.3 hours. By comparison, recent figures (as of 14 November 2008) estimate Zimbabwe's annual inflation rate at 89.7 sextillion (1021) percent.,[20] which corresponds to a monthly rate of 79.6 billion percent, and a doubling time of 24.7 hours. In figures, that is 89,700,000,000,000,000,000,000%.

In Pictures

In Pictures

In Pictures

In Pictures

Inflation rates since leaving the Gold Standard

Inflation and the Value of Money

• Deflation is a decrease in the general level of prices for goods.Example:the Great Depression in the early 20th Century: a deflation in asset and commodity prices, dramatic drops in demand and credit, and disruption of trade, ultimately resulting in widespread unemployment and hence poverty. However, historians lack consensus in determining the causal relationship between various events and the government economic policy in causing or ameliorating the Depression.

How do you set the price?

• Understanding some basics about supply and demand, and inflation and deflation, what determines a widget’s price?

Causes

• 1. If you have 100 apples and a report is released stating that apples help with eye-slight, what might happen to the price?

• 2. If you have 100 apples and a report comes our that apples cause people to be “taken short” more often, what might happen to the price?

• 3. If you receive 120 apples in today’s delivery, what might happen to the price?

• If you receive half of the normal delivery, what might happen to the price?

• 1.If demand increases and supply remains unchanged, a shortage occurs, leading to a higher equilibrium price.

• 2.If demand decreases supply remains unchanged, a surplus occurs, leading to a lower equilibrium price.

• 3.If demand remains unchanged and supply increases, a surplus occurs, leading to a lower equilibrium price.

• 4.If demand remains unchanged and supply decreases, a shortage occurs, leading to a higher equilibrium price.

Causes

• Demand-pull inflation – results in higher prices because consumers want to buy more goods.• Spend saving, earning, credit

• Cost-push inflation – cost of production increases• Materials, labor, etc.

• Money Supply inflation - When the money supply increases, it lowers the value of the dollar. • When the dollar declines relative to the value of foreign currencies, the prices

of imports rise, also creating cost-push inflation. (Currency wars)

US Inflation – Quantitative Easing

• http://www.bing.com/videos/search?q=inflation&FORM=HDRSC3#view=detail&mid=2430EFC437A8354656E32430EFC437A8354656E3

• How does inflation help Employment?

Quiz Review

• Define• Inflation• COLA• Reflation• Hyperinflation• Deflation• Demand-pull inflation• Cost-push inflation• Money Supply inflation• Time value of money

• Productivity• Real-cost inflation

• Discuss• How changes in supply and demand

effect prices.