CH 11 & 17 Inflation - What is inflation Ex gas prices...

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What is inflation ? Ex. gas prices increasing is not inflation bc it is a specific instance We know that the prices of individual goods are always changing Inflation doesn’t refer to a specific good but the average good Exists when there is an increase in avg price level Nominal income - your income in dollars - can’t compare over the years Real income - the buying power of your income Scenarios 1. Incomes rise 5%, prices rise 3% 2. Incomes rise 8%, prices rise 8% 3. Incomes rise 6% prices rise 7% 4. Incomes fall 2%, prices fall 4% Inflation in 1, 2 & 3 bc price is rising in all of them (4 is deflation) Nominal incomes are rising in 1, 2 & 3 Real incomes rise in 1 & 4 bc income increased faster than prices in 1 and income decreased slower than prices in 4 Scenario 2 most accurately depicts periods of inflation bc on avg incomes and prices rise at same rate Money spent on goods & services eventually becomes income based on circular flow so prices & income must rise at the same rate MYTH: inflation is bad bc prices rise faster than incomes taking away buying power If incomes rise at same rate as prices, why is inflation bad? Bc buying power stays the same Hyperinflation examples 1. China (1949) DAILY inflation rate: 14% 2. Germany (1922-23) DAILY inflation rate: 18% 3. Yugoslavia (1994) DAILY inflation rate: 65% 4. Zimbabwe (2007-08) DAILY inflation rate: 98% 5. Hungary (1945-46) DAILY inflation rate: 207%
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