Ch.+13.2


 * Ch 13.2 Notes & Questions #1-6**


 * The Effects of Rising Prices**
 * **Inflation**- Is a general increase in prices
 * Over the years prices fall and rise, but in the American economy, mostly have risen
 * Since WWII real estate prices have risen greatly
 * Inflation raises wages, and the price of most goods and services
 * **Purchasing Powers**- is the ability to purchase goods and services
 * As prices rises,the purchasing power of money declines
 * Price Indexes**
 * Housing cost is just one of the elements that economists consider when they study inflation
 * They study many other elements including all the small businesses out there, but they cannot study every price individually so they compare price levels instead which is the cost of goods and services in the entire economy at the given point in time
 * To help them calculate price level, economists usually turn to a price index
 * **Price Index-** Is a measurement that shows how the average price of a standard group of goods changes over time
 * this provides economists an average that they can compare to earlier averages to see how much price have changed over time
 * Using Price Index**
 * Price Indexes help consumers and business-people make economic decisions, whether one needs to save more money or not.
 * The government also uses indexes in making policy decisions, if inflation has shrunk purchasing power, minimum wage is increased
 * The Consumer Price Index**
 * Although there are many price indexes, the best known index focuses on consumers
 * **The Consumer Price Index (CPI)**- is computed each month by the Bureau of Labor Statistics (BLS)
 * The CPI is determined by measuring the price of standard foods meant to represent the "market basket" of a typical urban consumer
 * **Market Basket**- is a representative collection of goods and services
 * CPI helps consumers, businesses, and the government compare the cost of goods this month with that or a similar group costs months even years ago
 * About every 10 years, items in the market basket are updated to account for shifting consumer buying habits
 * Price Indexes and the Inflation Rate**
 * Economists also find it useful to calculate the **Inflation rate,** or the percentage rate of change in price level over tim
 * Although there are other price indexes, CPI will be the one you hear about more often
 * Determining the CPI**
 * To determine the CPI, the BLS establishes a base period to which it can comare current prices
 * every month, BLS representatives update the cost of the same market basket of goods and services by rechecking all the prices
 * each update cost is compared with the base-period cost to determine the index for that month, as costs rise, the index rises
 * CPI= updated cost/base period cost x 100, formula to determine CPI for a given year
 * Types of Inflation**
 * Inflation rates in the US have changed greatly over time
 * When inflation rates stay low between 1% and 3% there is typically no problems for the economy and this gives governments and businesses time to plan
 * however economists have noticed that when inlfation hits 5% the infaltion rate itself becomes unstable and unpredictable, which makes plannin difficult
 * **Core Inflation Rate-** is the rate of inflation excluding the effects of food and energy prices
 * The worst type of inflations is **Hyperinflation**-or inflation that is out of control
 * during periods of hyperinflation, inlfation rates can go as high as 100% or even 500% per month, and monley loses much of its value
 * this type of inlfation is rare but when it does occur it often leads to total economic collapse
 * Causes of Inflation**
 * Prices can rise steeply when demand for goods and services exceeds the supply available at current prices, such as during wartime
 * They can aslo rise steeply when productivity is restricted, such as when a long drought leads to poor harvests
 * Economists have many theories to why inflation happens and these are the main three, quantity theory, demand-pull theory, and the cost-push theory
 * The Quantity Theory**
 * The **Quantity Theory** of inflation states that too much money in the economy causes inflation
 * therefore, the money supply should be carefully monitored to keep it in line with the nations's productivity as measured by real GDP
 * they maintained that the money supply could be used to control price levels in the long term
 * the key to stable prices was to increase the supply of money at the same rate as the economy is growing, according to a study by economists from the University of Chicago
 * Demand-Pull Theory**
 * The **Demand-pull theory** states that inflation occurs when demand for goods and services exceeds existing supplies
 * Wages also rise as the demand for labor increases along with the demand for goods
 * Cost-Push Theory**
 * According to the **Cost-Push Theory**, inflation occurs when producers raise prices in order to meet increased costs
 * Higher prices for raw materials can cause costs to increases
 * Cost push inflation can lead to a spiral of ever-higher prices
 * That is, one increases in costs leads to an increase in prices, whcih leads to another increase in costs, and on and on
 * the process by which rising wages cause higher prices, is known as the **wage-price spiral**
 * Effects of Inflation**
 * effects of inflation can be mainly seen in purchasing power, income, and interest rates
 * Purchasing Power**
 * in an inflationary economy, a dollar will not buy the same number of goods that did it did in years past
 * Income**
 * Inflation sometimes, but not always erodes income
 * If wage increases match the inflation rate, a worker's real income stays the same
 * People who do not receive their income in wages such as doctors, lawyers, and businesspeople, can often increase their incomes to keep up with inflation by raising the prices they charge
 * **fixed income**- or income that does not increase when prices go up
 * the government will raise Social security benefits to keep up with inflation
 * Interest Rates**
 * people recieve a given amount of interest on money in their savings account, but their true return depends on the rate of inflation
 * when a banks interest rate matches the inflation rate, savers break even
 * they amount they gain in interest is taken away by inflation
 * savers may even lose money if the inflation rate is higher than their bank's interest rate
 * Recent Trends**
 * **Deflation-** or a sustained drop in the price level

Questions
 * 1) Inflation can affect purchasing power by making things harder to buy because let's say a car was $850 in the 60's but now the prices have shot up to $20,000.
 * 2) The purpose of CPI is so consumers, businesses, and the government can compare the cost of a group of goods this month with what the same or a similar group cost months or even years ago.
 * 3) A wage-price spiral is caused by risng prices of goods by producers which causes higher wages but higher wages leads to higher priced goods and services.
 * 4) It puzzled economists because typically low unemployment leads to higher inflation because companies compete for scarce worker by offering higher wages.
 * 5) 168/164x100= 102.44
 * 6) You may think that you're getting more money but in reality you're not because when your wage raises during inflation it usually means that prices for goods and services are going to rise so your going to have to use that higher wage to pay for higher priced goods and services.