What’s Up?

Inflation

A rise in the average price level

Painfully high gas prices!

How does the government know if the average price level is up?

• They send people to the store to check.

• Consumer Price Index. Measures price changes in commonly purchased items.

June $150

Dec $180

$165

How to calculate the rate of inflation as a percentage

Rate of inflation = Difference between 2 index #’s Divided by the 1st # given x 100

• Assume the CPI in 1998 was 145 and in 2000 it was 164. What was the inflation rate during this time period?

• 164-145 , 145

• 19_ 145 x 100 = 13 %• Could you expect your income to go up by 13% in 2 years?• If you made $35, 000 in ’98, how much would you need to make in 2000 just

to maintain your same standard of living?• 13% x $35,000 = $4,450 (that’s how much of a raise you need) or you need

to make $39,450 in 2000.

What causes prices to go up?

• Good Question!• Demand-Pull Inflation• Occurs when the total demand for goods and services

exceeds total supply or when the government prints “too much money”

• Cost-Push Inflation• Occurs when businesses raise prices in response to

higher resource costs (raw materials, energy, wages)• What would happen if a government let their money

supply get out of control?• “too much money chasing too few goods”

Germany’s Money Supply

• In 1919 Germany had 50,000 marks (millions of marks) in circulation.

• In 1923 Germany had 496,000,000,000,000 marks (in millions) in circulation.

• 500 Mark, Aluminum Would buy 1 dozen eggs or a pound of flour. Bread is 700 Mark a loaf.

“Hans, would you run to the store and get a loaf of bread? Here’s a

billion marks.”1 Billion Mark, October

20, 1923 Reichsbanknote Would buy ¾ Pound of Meat, 3 eggs or 1/6 Pound of Butter Bread is 670 Million Mark a loaf.

100 Billion Mark, Nov. 3 1923 City of Freital On November 1 100 Billion Mark would buy 3

pounds of meat. Bread is 3 Billion Mark a loaf.

On November 15 100 Billion Mark would buy 2 glasses of beer

Bread is 80 Billion Mark a loaf.

• Prices were changing so fast that in a café, people would order at one price and have to pay a higher price on their way out.

• Printing presses only printed on one side of a bill so they could print faster.

• One egg cost .08mark in 1914 and 80 billion marks in 1923

• TOP 100 AMERICAN FILMS (Unadjusted)

• Titanic (1997) • Star Wars: Episode IV - A New Hope (1977) • Shrek 2 (2004) • E. T. The Extra-Terrestrial (1982) • Star Wars: Episode I - The Phantom Menace

(1999) • Pirates of the Caribbean: Dead Man's Chest

(2006) • Spider-Man (2002) • Star Wars: Episode III - Revenge of the Sith

(2005) • The Lord of the Rings: The Return of the King

(2003) • Spider-Man 2 (2004) • The Passion of the Christ (2004) • Jurassic Park (1993) • The Lord of the Rings: The Two Towers (2002) • Finding Nemo (2003) • Spider-Man 3 (2007) • Forrest Gump (1994) • The Lion King (1994) • Shrek the Third (2007) • Transformers (2007) • Harry Potter and the Sorcerer's Stone (2001) • The Lord of the Rings: The Fellowship of the Ring

(2001) • Star Wars: Episode II - Attack of the Clones (2002) • Pirates of the Caribbean: At World's End (2007)

• TOP 100 AMERICAN FILMS

(Adjusted)

• Gone With the Wind (1939) • Star Wars: Episode IV - A New Hope (1977) • The Sound of Music (1965) • E. T. The Extra-Terrestrial (1982) • The Ten Commandments (1956 ) • Titanic (1997) • Jaws (1975) • Doctor Zhivago (1965) • The Exorcist (1973) • Snow White and the Seven Dwarfs (1937) • 101 Dalmatians (1961) • Star Wars: Episode V - The Empire Strikes Back

(1980) • Ben-Hur (1959) • Star Wars: Episode VI - Return of the Jedi

(1983) • The Sting (1973) • Raiders of the Lost Ark (1981) • Jurassic Park (1993) • The Graduate (1967) • Star Wars: Episode I - The Phantom Menace

(1999) • Fantasia (1940) • The Godfather (1972) • Forrest Gump (1994) • Mary Poppins (1964) • The Lion King (1994) • Grease (1978) • Thunderball (1965)

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• Hyperinflation: inflation that is out of control• Pricing Power: businesses and industries

increase prices to increase their profit margins. (oligopolistic inflation)

• Sectoral: increase in the price of the goods and services produced by a certain sector of industries

• an increase in the cost of crude oil would directly affect all the other sectors, which are directly related to the oil industry

• Fiscal Inflation: Fiscal Inflation occurs when there is excess government spending

• The Inflation Calculator