Living with Inflation

In the Chapter 6, read the “Living With Inflation” section and complete questions 1–2.
The Value of Money Might Increase or Decrease

In the Chapter 6 Exercises section, complete the matching and multiple-choice questions.

The Value of Money Might Increase or Decrease
Read this assignment. Then read Chapter 6 in your textbook.

What Is Inflation and Why Should We Be Concerned About It?
Inflation is a rise in the prices of most goods and services. With inflation, people experience a decrease in their purchasing power. Inflation can be troublesome because people find that money is worth less than it was in the past, and as a result they can't buy as much as they used to. Low-wage earners are hurt in this way. Retirees and others on a fixed income are also hurt by inflation. A fixed income is one in the form of a pension or dividends from investments and usually won’t increase with time. Savings accounts also take a hit from inflation. Since inflation lessens the value of money, any money saved would lose value over time.

Infographic compares people who benefit from inflation with people who are hurt by inflation.Effects of Inflation
Some people do, however, benefit from inflation. People who borrow money find that the money they pay back is worth less than the money they borrowed. For this reason, banks will raise interest rates if they think inflation is likely to occur. Homeowners may find that, due to inflation, the value of their house is increasing. Although a rise in housing prices looks good for the homeowner, keep in mind that prices all over the economy may be rising as well. Thus, any gains for the homeowner are absorbed by higher prices in general.

What Causes Inflation?
Demand-Pull Inflation
Inflation that occurs as a result of increased demand is known as demand-pull inflation. In Chapter 4, you learned that increased demand for a product can result in price increases. When many consumers are attempting to buy a limited number of goods and services, there won’t be enough goods and services to meet the demand at the current price. Producers and sellers will respond to this situation by raising prices simply because they can. The competition among consumers to buy limited amounts of goods drives the prices up.

Increasing Costs
Another reason for inflation is increasing prices. If the costs of running a business increase, the prices paid by consumers will also increase. For example, higher taxes, more expensive raw materials, and more expensive labor costs are all expenses that bring about increased prices. This type of inflation is known as cost-push inflation.