CH 33 CONSEQUENCES OF INFLATION
INFLATION…SO WHAT?

Brainstorm the stakeholders in an economy; list on
the board

Consumers, producers, government, borrowers,
lenders, beneficiaries, e.g. unemployed, the rich, the
poor

How do you think each of these stakeholders are
affected by inflation? Brainstorm in your group

Http://www.youtube.com/watch?v=lPDvbUoXV3o Inflation impacts festivities in India (2:11)

http://www.youtube.com/watch?v=WI1i5yhwOz8&feature=related German hyper inflation (5:14)
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Do getting started P151
CONSEQUENCES FOR HOUSEHOLDS
1.
Reduced purchasing power; if prices are rising
faster than incomes, purchasing power (how
many G&S can a fixed amount of money buy)
decreases
2.
Reduced value of savings;
e.g. save 1,000$ @ 10% interest and the inflation
rate is 20% After 1 year the saver has 1100$
but the price of 1000$ of G&S is now $1,200
3.
As inflation increases so do i/r’s; so loan
repayments become more expensive
CONSEQUENCES FOR BUSINESS
1.
 resource prices. If these can’t be passed on to
consumers, e.g. very competitive market the firm suffers
2.
Workers are likely to demand  in wages which may
cause conflict
3.
Menu costs; must inform consumers of $ changes
4.
Shoe leather costs; time & $ are used to look around for
cheaper resources
5.
Uncertainty causes unwillingness to invest/ expand /
employ, etc…
6.
Do Q1 P152
CONSEQUENCES FOR THE ECONOMY
1.
Inflation means domestic prices are relatively
higher than other countries. Therefore our exports
become more expensive and imports become
cheaper.
2.
Many government payments, e.g. pensions,
benefits, ages of state employees, are index
linked, i.e. linked to increases in RPI
INFLATION & THE FUNCTIONS OF MONEY
Medium
of
exchange
i.e. $ can be
used to settle a
debt
Standard
for
deferred
payment
i.e. $ measures
the relative
values of G&S
Functions
of money
Unit of
account
i.e. $ can be
exchanged for
G&S
Store of
value
i.e. $ can be
kept & used
at a later date
INFLATIONS EFFECTS ON THE
FUNCTIONS OF MONEY
Brainstorm in 4 groups & report back your ideas
1. Medium of exchange; in times of very high
inflation $ becomes worthless & gold or other
usable products become more valuable
2. Store of value; the value of savings or holding $
is eroded by inflation
3. Unit of account; prices become confused &
distorted causes business uncertainty
4. Standard for deferred payment; the future value
of $  meaning those in debt benefit & lenders
lose out
* Try exam practice P154
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