Inflation and Bubbles and Tulips (7) Flashcards
What’s purchasing power?
How much stuff you can consume with the money you have.
True or false: a rise in prices has basically the same effect as a cut in wages.
True!
What’s INFLATION?
- When an economy’s supply of currency (dollar bills and coins) rises per person…
- But the economy didn’t actually become more productive…
- So it only looks like there’s more money when actually, cash is just worth less now…
- So prices go up.
Short version: more dollar bills without more stuff to sell means money is worth less, and prices go up.
What is a market BUBBLE?
When the accepted price of something for sale is way higher than its real value because an unusual amount of buyers were tricked into purchasing a given good or service. (Eventually, you run out of buyers…and then what happens to those prices everyone was counting on to make money??)
The average movie ticket today is $8, but in 1939 it was 12 cents! It’s the same commodity for sale, so why the huge price difference?
Inflation drove up the prices (money is worth less now than it used to be.)
What is the CONSUMER PRICE INDEX (CPI)?
A statistical number constructed using the prices of a sample of representative items (“consumer basket”) whose prices are collected periodically.
What is a CONSUMER BASKET?
The list of items the average consumer buys in a given year.
What is a “real price”?
A price from the past that HAS been adjusted for inflation
What is a “nominal price”?
A price from the past that has NOT been adjusted for inflation
True or false: inflation is the ONLY thing economists have to calculate to explain rising prices.
FALSE! Some products have gotten to be WAY better quality and are actually worth more than they used to be. Economists have special math formulas they use to keep track of it all…whew!
True or false: being rich is about how much money you have.
FALSE! It’s about how much PURCHASING POWER you have (you aren’t so rich if you have lots of money but nowhere to spend it, right?)
Who is richer: a man with $1 million where everyone else only has $100, or a man with $1 million where everyone else also has $1 million?
The man who has more money than everyone else. If everyone has that amount of money, they’re willing to pay more to get what they want, prices go up…and I have less purchasing power.
What causes inflation?
When an economy has more money than goods and services.
- Consumers can cause it when they want more of a product than there is available, so they offer more $
- Producers can cause it when it costs them more to produce the item, so they make less but charge more $
If the U.S. wants to help the economy, should it print more money? Why/why not?
NO! Because it will just make prices go up…the money will only be worth what is available to be bought and sold. You can’t force prosperity!
True or false: all rising prices are due to inflation.
FALSE! If price changes can be completely explained based on supply and demand, then they aren’t due to inflation. But if supply and demand doesn’t explain it completely…something’s fishy and it might be inflation.
