Inflation
The general increase in prices
of goods and services over a
period of time.
During periods of inflation the
purchasing power of money
decreases
A little bit of inflation over
time is completely natural, but
too much can become a bad
thing.
Deflation
A decrease in the general level
of prices over time.
In periods of deflation, the
purchasing power of money
rises
Causes of Deflation Continued
• 1. Decrease in Money Supply
• For example:A central bank may
use a tighter monetary policy by
increasing interest rates. Thus,
people, instead of spending their
money immediately, will prefer to
save them. In addition, increasing
interest rates will lead to higher
borrowing costs, which will also
discourage spending in the
economy.
• 2. A unnatural spike in economic
activity which greatly increases the
purchasing power of consumers.
• For example: A small city known for
mining coal finds 1000s of pounds
of diamonds. Knowing that the
company is rich, the workers fight
for a significantly higher wage. The
purchasing power of the
community has increased.
Unemployment Effects
When demand for a product or service
decreases, a business or corporation must
Downsize: this means that they must
decrease production and supply to suit the
lower demand.
This means that the company must Layoff
workers. A Layoff occurs when an
organization can no longer justify paying an
employee for their work. The worker loses
their job(for no fault of their own)
Brainstorm: How does unemployment affect our
economy as a whole? How does is affect society as
a whole?
Unemployment Effects
When individuals lose their jobs, those that remain must pick up the slack.
Although corporations may show some profits during these times, it often comes
from employee cuts or reduced wages for those who remain.
Unemployed people lose purchasing power which is the value of currency
expressed in the amount of goods and services you're able to purchase
Unemployment Effects
Protectionism (opposite of free trade) and severe restrictions on immigration happen with high
levels of unemployment.
Less volunteering and higher crime. Elevated crime makes sense because absent a wage-paying
job people may turn to crime to meet their economic needs or simply to alleviate boredom.
Unemployment leads to higher payments from state and federal governments for
unemployment benefits as well as food assistance, and Medicaid.
Unemployment Effects
Lower taxation amounts
Governments become nervous about the consequences of inflation, but unemployment is
likewise a serious issue.
Worse still, some of the worst effects of unemployment are both subtle and very long-lasting consumer and business confidence are key to economic recoveries and workers must feel
confident in their future to invest in developing the skills that the economy needs to grow in the
future.
Types of Inflation
Cost-Push Inflation
• Cost-push inflation occurs when
overall prices increase (inflation)
due to increases in the cost of
wages and raw materials.
• Cost-push inflation can occur when
higher costs of production
decrease the aggregate supply (the
amount of total production) in the
economy.
• Since the demand for goods hasn't
changed, the price increases from
production are passed onto
consumers creating cost-push
inflation.
Example
• in early 1970s, the Organization of
Petroleum Exporting Counties
(OPEC) took steps to decrease
global oil supply. During the period
there was no extraordinary
increase in the volume of
consumption, but the prices still
surged. What sort of inflation this
most likely is?
• Prices of most products increased,
because almost all production in
some way involves oil.
Demand-Pull Inflation
Demand Pull Inflation
Demand-pull inflation results
from strong consumer demand.
Many individuals purchasing the
same good will cause the price
to increase.
when such an event happens to
a whole economy for all types of
goods, it is called demand-pull
inflation.
• demand-pull inflation is a result
of too many dollars chasing too
few goods.