Chapter 8 - Inflation. After reading the material in this chapter, you should be able to: Define inflation and calculate the inflation rate using the consumer price index (CPI), explain the difference between relative price shifts and the overall inflation rate, calculate and show how incomes and wages can be adjusted for inflation, discuss the impact of unexpected and expected inflation. | Chapter 8 Inflation McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives Define inflation and calculate the inflation rate using the consumer price index (CPI). Explain the difference between relative price shifts and the overall inflation rate. Calculate and show how incomes and wages can be adjusted for inflation. Discuss the impact of unexpected and expected inflation. 8- Basics of Inflation Inflation is the rise and fall in the overall level of prices in the economy as a whole. The overall price level is an average of millions of prices of different goods and services. Inflation is one of the key measures of the health of the economy. The economy is in trouble if prices are rising or falling too fast. 8- Basics of Inflation The goal of economic policymakers is to keep inflation under control. Inflation is a problem since it reduces consumers’ purchasing power. If inflation increases, your money buys less and less. The situation where prices are falling is known as deflation. 8- Average Price Level At any time in the economy, the price of some goods and services will be rising, while others will be falling. So when we measure inflation, we are concerned with the extent that overall prices (prices across the economy) are rising or falling, not with the rise or fall of any particular good or service. 8- Average Price Level The average price level in the economy measures how much it costs to buy a market basket of common goods and services. The . Bureau of Labor Statistics (BLS) selects the contents of the market basket which represents the goods and services that the typical . household will buy. The BLS gives each item in the market basket a certain weight to represent its relative importance in the typical budget. 8- Market Basket The two largest items in the market basket: The cost of housing measured by the owners’ equivalent rent of primary residence. This is the single . | Chapter 8 Inflation McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives Define inflation and calculate the inflation rate using the consumer price index (CPI). Explain the difference between relative price shifts and the overall inflation rate. Calculate and show how incomes and wages can be adjusted for inflation. Discuss the impact of unexpected and expected inflation. 8- Basics of Inflation Inflation is the rise and fall in the overall level of prices in the economy as a whole. The overall price level is an average of millions of prices of different goods and services. Inflation is one of the key measures of the health of the economy. The economy is in trouble if prices are rising or falling too fast. 8- Basics of Inflation The goal of economic policymakers is to keep inflation under control. Inflation is a problem since it reduces consumers’ purchasing power. If inflation increases, your money buys less and less. .
