Ch 13 sec 3: Inflation
Inflation is an extended rise in the economy’s overall price level. When prices rise, the dollar can buy less;
thus, it loses purchasing power.
We can adjust prices to reflect effect of inflation. For example, in 1915 JD Rockefeller’s net worth was $900 million dollars. His net worth, adjusted for inflation, would be $189 billion dollars today.
Model T
We measure the rate of inflation with the Consumer Price Index.
The CPI shows the average change in price of a wide variety of goods and services. It is an
average.
The typical annual (yearly) rate of inflation in the US is
3%.
Some nations have experienced hyperinflation, which is a dangerously high
rate of inflation.
Hyperinflation: Yugoslavia, 1993
• 5 quadrillion percent rate of inflation (That’s 5,000,000,000,000,000%!)
• Typically 1 Loaf of bread costs 1 Dinara, and imagine your life-savings was one million Dinara.
• Nov. 12, 1993: 1 Loaf cost 1 million Dinara
Nov. 23, 1993: 1 Loaf cost 6.5 million Dinara
Dec. 15, 1993: 1 Loaf cost 3.7 billion Dinara
Dec. 29, 1993: 1 Loaf cost 950 billion Dinara
Jan. 4, 1994: 1 Loaf cost 6 trillion Dinara!
Post WWI hyperinflation in Germany
Late 1960’s: Demand pull inflation due to Vietnam War.
US tries to supply troops while keeping everyone at home supplied.
Cost Push Inflation: 1973 Yom Kippur War
US support for Israel leads to Arab oil embargo
Scarcity of gas leads to high prices for gas…
…leads to high prices for everything else.
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