Transcript Inflation - Economics on Demand

Hershey Bar
U.S. National Average
Hershey Bar
1908
.02
1936
.05
1955
.08
1970
.15
1986
.40
1995
.65
2004
.80
2014
.89
Then…
Inflation
“I remember when a movie only cost a
nickel……”
Inflation Simulation – Where did inflation come
from?
Round # 1 –
Round # 2–
Round # 1 – Round # 3–
Economy is doing really well = low unemployment.
Everybody spends more of their disposable income as consumer
confidence is high!
Round # 2 –
Lower interest rates can cause inflation by making it less expensive
to borrow money.
Round # 3 –
Government spending increases or U.S. Government can buy bonds
from bondholders.
Inflation Simulation CriticalThinking Questions
1. How were students who saved in round 1 and 2 hurt by
inflation?
• The value of their dollar went down each round.
• Round #1 money is worth less in round #2
2. How does inflation affect a person on a fixed (unchanging)
income?
• Purchasing power decreases every year.
• Their fixed income buys less because of the gradual
increase in prices.
Anticipated v. Unanticipated
Anticipated: Healthy, plan accordingly.
vs.
Unanticipated: Unpredictable, hurtful.
Creeping:
1-3% a year and healthy
(Anticipated)
ChronicChanges month to month
Ex.
Recent gas prices
11/16/10 $3.07
5/09/11
$4.29
• 39% increase.
10/9/12
11/28/12
4.75
3.83
• 24% decrease.
Hyper100-500% in 1 month
(Can crush banks and
savings accounts)
Ex. Natural disasters
can cause hyper
inflation
Causes of Inflation
Demand-Pull: TheWage-Price
demandRelationship
for the goods
goes up so prices
“Spiral”
of the good go up as well.
-Inflation causes people to demand higher wages.
-People spend more money from their wage
increases, which causes more inflation.
The cycle repeats itself….
Cost-Push: Cost of producing goods pushes the price of
-Inflation causes people to demand higher wages.
the goods
up.spend more money from their wage
-People
increases, which causes inflation.
ex. Min wage increase
Who’s hurt/helped by
inflation?
1.
Your friend rents an apartment with a three year
Gain
The price of their rent will not rise for three years
while local rents increase for inflation.
lea
Who’s hurt/helped by
unanticipated inflation
2. You borrow money from Chase Bank at 3% for
30 years.
Gain
You are paying back a fixed interest lower than rate of
inflation.
Who’s hurt/helped by
inflation?
3. A retired man lives entirely on income from Social
Security.
Gain or break even.
Social Security adjusts to inflation
because it has a COLACost of Living Adjustment
Who’s hurt/helped by
inflation?
4. Banks issue a lot of long-term fixed-rate loans.
Hurt
They are paid back in fixed interest rate. If
inflation % exceeds the rate of loan, banks are
being paid back in dollars that are worth less
than inflation rate.
Who’s hurt/helped by
inflation?
5. Your savings from your job are in a savings
account paying a fixed rate of interest.
Hurt
The money you have in the bank no longer beats
inflation. As time goes on
it loses value
(buys less).
Time for a Trial!!!!!
The Trial of Ms.
Ann Flation
The Trial
Witnesses for Prosecution
Defense
Mr.
Con Glomerate:
Business owner who
charges an arm and a leg.
Ms.Fix Ed Income:
Old retiree who misses her
Bingo.
Prof. I Can’t Getahead:
College econ professor
looking for a raise.
.
Witnesses for
Ms. Iona Lots:
Real estate investor.
I.O. Manny Bucks:
Big spender who loves his
credit cards.
Ann Flation:
The woman who started it
all.
Who was helped/hurt
T - Chart
Who is Hurt By Inflation
and Why?
Mr. Con Glomerate- rising
production costs make his products
more expensive.
Ms. Fix Ed Income- her income is
losing money because prices are
rising and her income is fixed.
Prof. I Can’t Getahead- inflation is
causing prices to rise faster than his
income.
Who is Helped by Inflation
and Why?
Ms. Iona Lots- her real estate
investments are growing fast!
Mr. I.O. “Manny Bucks”- he is
paying his debt back with inflated
dollars, therefore he is actually
paying less.