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2.5 inflation

Topic 2.5
Big Bucks in Zimbabwe
This bill was worth 100 billion Zimbabwean dollars when issued in 2008. There were even bills
issued with a face value of 100 trillion Zimbabwean dollars. The bills had $100,000,000,000,000
written on them. Unfortunately, they were almost worthless. At one point, 621,984,228 Zimbabwean
dollars were equal to one U.S. dollar. Eventually, the country abandoned its own currency and
allowed foreign currency to be used for purchases. (modification of work by Samantha Marx/Flickr
Creative Commons)
The Weighting of Consumer Price Index (CPI) Components
Of the eight categories used to generate the CPI, housing is the highest at 41 percent. The
next highest category, transportation at 16.8 percent, is less than half the size of housing.
Other goods and services, and apparel, are the lowest at 3.4 percent and 3.6 percent,
respectively (Bureau of Labor Statistics, n.d.).
U.S. Price Level and Inflation Rates
since 1913
Graph (a) shows the trends in the U.S.
price level from the year 1916 to 2014. In
1916, the graph starts out close to $10,
rises to around $20 in 1920, stays
around $16 or $17 until 1931, when it
jumps to around $15. It gradually
increases, with periodic dips, until 2014,
when it is around $236. Graph (b) shows
the trends in U.S. inflation rates from the
year 1916 to 2014. In 1916, the graph
starts out at 7.7 percent, jumps to close
to 18 percent in 1917, drops drastically to
close to –11 percent in 1921, goes up
and down periodically, until settling to
around 1.5 percent in 2014.
Countries With Relatively Low Inflation Rates, 1960–2014
This chart shows the annual percentage change in consumer prices compared with the
previous year’s consumer prices in the United States, the United Kingdom, Japan, and
Countries with Relatively High Inflation
Rates, 1980–2013
These charts show the percentage change
in consumer prices compared with the
previous year’s consumer prices in Brazil,
China, and Russia.
(a) Of these, Brazil and Russia
experienced hyperinflation at some
point between the mid-1980s and mid1990s.
(b) Though not as high, China also had
high inflation rates in the mid-1990s.
Even though their inflation rates have
come down over the last two decades,
several of these countries continue to
see significant inflation rates. Sources:
(Federal Reserve Bank of St. Louis,
2013a; Federal Reserve Bank of St.
Louis, 2013b; Federal Reserve Bank of
St. Louis, 2013c).
U.S. Minimum Wage and Inflation
After adjusting for inflation, the federal minimum wage dropped more than 30 percent from
1967 to 2010, even though the nominal figure climbed from $1.40 to $7.25 per hour.
Increases in the minimum wage in between 2008 and 2010 kept the decline from being
worse, as it would have been if the wage had remained the same as it did from 1997 through
2007. (Sources: U.S. Department of Labor, n.d.; Bureau of Labor Statistics, n.d.b)
U.S. Inflation Rate and U.S. Labor Productivity, 1961–2014
Over the last several decades in the United States, there have been times when rising
inflation rates have been closely followed by lower productivity rates and lower inflation
rates have corresponded to increasing productivity rates. As the graph shows, however,
this correlation does not always exist.
Instructional Support Ancillaries for TEA AP®
The following materials are available to support instruction of TEA AP® Macroeconomics:
TEA AP® Macroeconomics PowerPoint Slides
TEA AP® Macroeconomics Instructor’s Solution Manual
TEA AP® Macroeconomics Alignment Map
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