March 13, 2012 Types of
Inflation
Goal 1: Compare two types of inflation
Type 1: Demand-Pull Inflation-An increase in prices that
is the result of a total demand for goods and services that
is greater than the supply.
-demand-pull inflation usually occurs when the economy
is in the expansion part of the business cycle
-happens with growing production, growing investments,
and growing employment
-consumers are confident and want to spend more
money
-too much demand, not enough supply
-causes a shortage and higher prices (Inflation)
Example:
-In 1960's U.S Government was buying materials to fight
Vietnam War.
-Government was also focused on fighting poverty.
-Almost anyone who wanted a job had one.
-People had extra money to spend.
-More products were in demand than businesses could
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-More products were in demand than businesses could
supply
-shortage resulted in higher prices (inflation)
Type 2: Cost-Push Inflation-increase in the price level
resulting from an increase in resource prices that causes
per-unit production costs to go up
-when the cost of raw materials, labor, or tools increases
businesses react by cutting back on production
-shortage forces prices to go up (Inflation)
-Cost-Push Inflation usually occurs during a contraction
phase of the business cycle
-happens with falling production, falling investment, and
increase in unemployment
Example 1: Oil
-Price of oil increases due to war or instability in the
middle east
-cost to produce goods increases, a lot of machines/tools
use oil to run
-cost of shipping/delivering products goes up
-Extra costs lead to business cutting back production
-shortage leads to higher prices (inflation)
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Example 2: Wage-Price Spiral
Wage-price Spiral
-Wages are increased
-Production Costs? Up/Down
-Prices? Up/Down
-Workers demand even higher wages to pay higher prices
Goal 2: What are the different degrees of inflation?
Hyperinflation -a very rapid (fast) rise in the price level
-an extremely high rate of inflation
-can go as high as 500 percent a year
-hyperinflation is caused by the government expanding
the money supply
-government creating more money increases total
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-government creating more money increases total
spending
-causes extreme demand-pull inflation
Creeping Inflation-inflation in the range of 1 to 3 percent
Galloping Inflation-a more intense form of inflation that
can go as high as 100 to 300 percent
Deflation-a decline in the economy's price level
-Deflation is not necessarily good
-Businesses recognize you don't need as much income
and will make wage cuts
-businesses unable to produce goods at the lower price
-This causes a lot of unemployment, happened during the
depression
Exit Question: What are the two types of inflation and
the four different degrees of inflation?
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