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Inflation
Defining, Measuring, and Assessing Inflation
Inflation
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Inflation > Defining, Measuring, and Assessing Inflation
Defining, Measuring, and Assessing Inflation
• Defining Inflation
• Measuring Inflation
• Price Indices and the Rate of Change of Prices
• The Costs of Inflation
• Distribution Effects of Inflation
• Deflation
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Appendix
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Inflation
Key terms
• cost of living The average cost of a standard set of basic necessities of life, especially of food, shelter and clothing
• deflationary spiral A situation where decreases in price lead to lower production, which in turn leads to lower wages and
demand, which leads to further decreases in price.
• inflation An increase in the general level of prices or in the cost of living.
• market basket A list of items used specifically to track the progress of inflation in an economy or specific market.
• menu costs The cost to a firm resulting from changing its prices.
• money supply The total amount of money (bills, coins, loans, credit, and other liquid instruments) in a particular economy.
• nominal interest rate The rate of interest before adjustment for inflation.
• price index A statistical estimate of the level of prices of some class of goods or services.
• purchasing power The amount of goods and services that can be bought with a unit of currency or by consumers.
• purchasing power The amount of goods and services that can be bought with a unit of currency or by consumers.
• purchasing power The amount of goods and services that can be bought with a unit of currency or by consumers.
• Real interest rate The rate of interest an investor expects to receive after allowing for inflation.
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Inflation
• shoeleather costs The cost of time and effort that people spend trying to counter-act the effects of inflation.
• velocity of money The average frequency with which a unit of money is spent on new goods and services produced
domestically in a specific period of time.
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Inflation
U.S. Inflation Rate
The U.S. inflation rate is measured by comparing the price of goods in one year to the price of goods in a previous base year.
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Wikimedia. "US Inflation rate." GNU FDL http://commons.wikimedia.org/wiki/File:US_Inflation_rate.png View on Boundless.com
Inflation
Inflation and the Money Supply
While the two variables are not exactly equivalent in the short run, over time the money supply has had a direct relationship to the level of inflation. This
is consistent with the quantity theory of money.
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Wikipedia. "M2andInflation." CC BY-SA http://en.wikipedia.org/wiki/File:M2andInflation.png View on Boundless.com
Inflation
Consumer Price Index and Inflation
The above graph shows the annual inflation rate and the consumer price index from 1913 to 2003. As long as the inflation rate was above zero, the CPI
was increasing.
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Wikimedia. "Consumer Price Index US 1913-2004." GNU FDL http://commons.wikimedia.org/wiki/File:Consumer_Price_Index_US_1913-2004.png View on
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Inflation
Interest Rates and Inflation
Part of the reason that lenders charge interest is to recoup the cost of inflation over time.
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Wikimedia. "Malawi interest rates." Public domain http://commons.wikimedia.org/wiki/File:Malawi_interest_rates.JPG View on Boundless.com
Inflation
The Great Depression
Most economists agree that the high levels of deflation during the 1930s made the Great Depression much more severe and long-lasting. It discouraged
consumption, borrowing, and investment that would increase economic activity.
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Wikimedia. "Unemployed men queued outside a depression soup kitchen opened in Chicago by Al Capone, 02-1931 - NARA - 541927." Public domain
http://commons.wikimedia.org/wiki/File:Unemployed_men_queued_outside_a_depression_soup_kitchen_opened_in_Chicago_by_Al_Capone,_02-1931_-
Inflation
Menu Costs
The cost to a restaurant to change the prices on menus is incurred even with low and expected inflation.
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Wikipedia. "Del Taco menu board." CC BY http://en.wikipedia.org/wiki/File:Del_Taco_menu_board.JPG View on Boundless.com
Inflation
Hyperinflation in Zimbabwe
The photo shows bills worth millions and billions of dollars that were printed by the Zimbabwe government as a response to massive inflation. At one
point the 50 billion dollar note was worth less than three US dollars.
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Flickr. "Fifty Billion Dollars | Flickr - Photo Sharing!." CC BY-SA http://www.flickr.com/photos/villes/2693551009/ View on Boundless.com
Inflation
Attribution
• Wiktionary. "money supply." CC BY-SA 3.0 http://en.wiktionary.org/wiki/money_supply
• Wiktionary. "inflation." CC BY-SA 3.0 http://en.wiktionary.org/wiki/inflation
• Wikipedia. "velocity of money." CC BY-SA 3.0 http://en.wikipedia.org/wiki/velocity%20of%20money
• Wikipedia. "Inflation." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Inflation
• Wikipedia. "Quantity theory of money." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Quantity_theory_of_money
• Wiktionary. "market basket." CC BY-SA 3.0 http://en.wiktionary.org/wiki/market_basket
• Wiktionary. "purchasing power." CC BY-SA 3.0 http://en.wiktionary.org/wiki/purchasing_power
• Wikipedia. "Consumer Price Index." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Consumer_Price_Index
• Wikipedia. "Inflation." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Inflation%23Measures
• Wiktionary. "price index." CC BY-SA 3.0 http://en.wiktionary.org/wiki/price_index
• Wiktionary. "cost of living." CC BY-SA 3.0 http://en.wiktionary.org/wiki/cost_of_living
• Wikipedia. "Price index." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Price_index
• Wiktionary. "purchasing power." CC BY-SA 3.0 http://en.wiktionary.org/wiki/purchasing_power
• Wikipedia. "shoeleather costs." CC BY-SA 3.0 http://en.wikipedia.org/wiki/shoeleather%20costs
• Wikipedia. "menu costs." CC BY-SA 3.0 http://en.wikipedia.org/wiki/menu%20costs
• Wikipedia. "Inflation." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Inflation%23Effects
• Wikipedia. "Shoe leather cost." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Shoe_leather_cost
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Inflation
• Wikipedia. "Menu cost." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Menu_cost
• Wikipedia. "Real interest rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Real%20interest%20rate
• Wikipedia. "nominal interest rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/nominal%20interest%20rate
• Wikipedia. "Inflation." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Inflation%23Effects
• Wikipedia. "Inflation." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Inflation%23Effects
• Wiktionary. "purchasing power." CC BY-SA 3.0 http://en.wiktionary.org/wiki/purchasing_power
• Wikipedia. "deflationary spiral." CC BY-SA 3.0 http://en.wikipedia.org/wiki/deflationary%20spiral
• Wikipedia. "Deflation." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Deflation
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