chapter 3-1 inflation and prices - cooldogpf.weebly.com … · chapter 3-1 inflation and prices...

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Productivity Slacker

HOW MUCH MONEY IS ON THIS BACKGROUND?????

Inflation is an increase in the general level of prices for goods and services.

Changing prices will affect the spending power of both producers and consumers.

You like this obnoxious background, don’t you?

If you can read this, you don’t need glasses.

Inflation is measured by the U.S. Government.

The measurement tool used is called the Consumer Price Index (CPI).

Businesses base price decisions in part on what consumers are buying and not

buying.

Disinflation occurs when prices are rising, but at a slow rate.

Prices are rising but at a decreasing rate.

(seasonal items)

Reflation occurs when prices are high but then drop due to lower demand; then they are restored to the previously high level.

(Gas prices & SUVs)

When prices are rising so rapidly they are out of control, this is hyperinflation.

February 1 - $1March 1 - $3April 1 - $9May 1 - $27June 1 - $81July 1 - $243August 1 - $729September 1 - $2,187October 1 - $6,561November 1 - $19,683December 1 - $59,049January 1 - $177, 147February 1 - $531,441

With 300% monthly inflation, a bottle of Coke that cost $1 today would cost over a half million dollars within a year.

Deflation is the lowering of overall price levels.

Some products go down in price over time even when the country is not in a time of deflation. Example: Computers

Inflation can be caused by different factors in the economy.

Demand-pull inflation occurs when consumers want to buy more goods and

services than producers supply.

“Too many dollars chasing too few goods.”

Cost-push inflation occurs when producers raise prices because their costs

to create products are rising.

THIS OCCURS WHEN COST INCREASES ARE NOT OFFSET WITH GREATER OUTPUT THAT LOWERS THE COST OF EACH UNIT MADE.

In other words, businesses can avoid “pushing” increased materials or labor costs onto their customers by reinventing themselves and

finding ways to produce MORE goods and services with LESS money.

Example: Titleist comes up with a way to make 100 golf balls per minute rather than just 80 per

minute using the SAME amount of labor, energy, equipment, etc.

Production goes up while cost stays the same.

Productivity is the measure of the efficiency with which goods and services

are made.

As resources diminish or become harder to get, prices rise in the form of real-cost

inflation.

Higher Inflation = Higher Employment

Lower Inflation = Lay Offs (Lower Profits)

Zero Inflation = Businesses may not be able to afford to hire workers, therefore

2%-3% inflation can be good for the economy.

Inflation has a negative effect on the value of money.

As general price levels rise, the value of money falls.

The time value of money is a concept that says a dollar you receive in the future is

worth less than a dollar you receive today.

THE MCDONALD’S HAPPY MEAL:

1979 Cost: $1.00

2009 Cost: $3.00

(300% increase over 30 years)

2039 Cost: $9.00

2069 Cost: $27.00

To waste time at work and intentionally do a poor job does not show ethical

behavior.

Monetary policy refers to actions taken by the Federal Reserve System, which

includes raising and lowering interest rates.

The Fed is the central bank of the United States and one of its many roles is to

control the money supply.

Outgoing Chair Janet Yellen New Chair Jerome Powell

The discount rate is the rate that banks have to pay to borrow money from the

Fed.

The federal funds rate is the rate at which banks can borrow from the excess

reserves of other banks.

The prime rate is the rate that banks charge to their most creditworthy

business customers.

Fiscal policy refers to action taken by the federal government to manage the

economy, which includes raising and lowering taxes.