Transcript increase! Let`s practice looking at some data…

Inflation
Inflation During the
Great Depression
;
•• What
economic
What
does
• What is this
• What
interesting
data
imagemight
revealyou
about
happening
in
this
details
do
you
see in
prices
wages
use toand
explain
photograph?
this
photograph?
from
1929-1942?
what
you see in
the photograph?
A New York City restaurant offers
bargain prices to attract customers.
Inflation is an increase in the
average price of goods and
services in an economy.
Deflation is a decrease in the
average price of goods and
services.
Stagflation is a situation in which
prices increase but the economy
does not grow
How is inflation calculated?
By using the Consumer Price Index (CPI)!
– 400 goods and services
are calculated in the
“Market Basket”
– Each group of items is
weighted to reflect how
much consumers spend
on it
– Re-calculated yearly to
find the difference
– Growth of the price index
= inflation!
Normal:
• A certain amount of inflation is normal and expected.
• The normal (“creeping”) rate of inflation is 3.4% per
year.
Abnormal:
• HYPERINFLATION: Inflation goes into overdrive!
• Germany in the 1920’s (Loaf of bread: 1 mark in 1920,
2 billion marks in 1923)
• Zimbabwe, 2008 (1000%)
• DEFLATION: Prices go down over time
• Good for consumers, savers, & lenders
• Bad for borrowers & businesses
;
What causes
inflation?
• Quantity Theory:
– Too much money circulating!!!
• Demand-Pull Theory:
– Demand for goods exceeds supply & causes a
shortage…“Pulls” prices upwards
• Cost-Push Theory:
– Costs of production increase, so prices are
“pushed” upwards
– Result of the Wage-Price Spiral
Wage-Price Spiral:
• A vicious cycle in which rising prices drive
up wages and then rising wages drive up
prices. The result is an inflationary spiral
that can be hard to break.
Biggest losers!!!
(People most hurt by inflation)
People on a
fixed income
Retired
As Inflation ↑, Purchasing Power ↓
Biggest WINNERs!!!
(People least affected by inflation)
Borrowers
(paying back loans with
devalued money)
Homeowners
As inflation ↑, these people see
their “wealth” increase!
Let’s practice looking at some data…
During which of these years
was the inflation rate the
lowest? The highest?
Let’s practice looking at some data…
Based on what you know about
the inflation rate and how it’s
determined, what might explain
the deflation before 1933?
Let’s practice looking at some data…
What might explain the
fluctuations between
1933 and 1940?
Let’s practice looking at some
data…
• What might explain the
increase in inflation after
1940?
Based
How on
dothese
the
data, what
inflation rate
generalizations can
data help to
you make about the
explain
what
health
of the
U.S.
you seeduring
in thethe
economy
Great
Depression?
photograph?