CHAPTER 50
Inflation
LEARNING OBJECTIVES
Describe how inflation is measured and, given appropriate data, calculate inflation.
Compare and contrast the different causes of inflation.
OUTLINE OF CHAPTER
I. How is Inflation Measured
II. Why does Inflation Matter?
KEY TERMS
cost-push inflation
inflation caused by input costs, including high wages and salaries
demand-pull inflation
traditional inflation caused by the upward pull of aggregate demand
effective demand
the aggregate demand in money terms, including both desire for products and the money for
products
inflation
the rate at which the overall price level increases
oligopoly
only a few large corporations in each market
ANSWERS TO END OF CHAPTER REVIEW QUESTIONS
Describe how inflation is measured and, given appropriate data, calculate inflation.
1. What are two measures of price levels introduced in this chapter? How are they similar;
how are they different?
2. Assume the CPI rose from 117 to 123 between 2005 2006. What was the inflation rate?
Compare and contrast the different causes of inflation.
3. In most cyclical expansions, do prices go up or down? Why?
4. What happens to prices in a major war situation? Why
Explain why there has been inflation in every recession of the last fifty years.
5. What has happened to prices in recessions since the 1950s? Why?
In recessions since the 1970s, price inflation continued through the contraction period.
6. In most cyclical recessions up until the 1950s, did prices go up or down? Why?
APPENDIX 50.1
Market Power and Administered Prices
LEARNING OBJECTIVES FOR APPENDIX 50.1
Compare and contrast price movements in competitive markets and monopoly/oligopoly
OUTLINE OF APPENDIX
ANSWERS TO APPENDIX 50.1 REVIEW QUESTIONS
Compare and contrast price movements in competitive markets and monopoly/oligopoly
markets.
1. What are the differences between a competitive market and monopoly/oligopoly
markets? How does that impact prices and price formation?
Oligopoly means that market power is concentrated in a few corporations in the industry.
2. Describe differences in historical price movements between competitive and
monopoly/oligopoly markets?
Competitive prices fell more than oligopoly prices. For example, between 1929 and
Explain the relationship of oligopolies and profit-push inflation.
3. Describe how monopoly/oligopoly firms protect their profits. Can a firm owner in a
competitive market do this? Explain.
In recessions, oligopoly corporations tend to keep prices high enough to show a
4. What is profit-push inflation?
APPENDIX 50.2
Wage and Price Controls
LEARNING OBJECTIVES FOR APPENDIX 50.2
Explain the goal of wage and price controls.
Compare and contrast the criticisms of price controls by conservative and progressive
economists.
OUTLINE OF APPENDIX
ANSWERS TO APPENDIX 50.2 REVIEW QUESTIONS
Explain the goal of wage and price controls.
1.
control?
2. Describe historical examples of wage and price controls. Were they effective?
Compare and contrast the criticisms of price controls by conservative and progressive
economists.
3. What are conservative criticisms of price and wage controls? Progressive criticisms?
How are they similar? Different?
