Inflation, Deflation, and Unemployment

Inflation, Deflation, and Unemployment — page 1 — Economics an intimidating word for some is a social science science that studies how a society’s resources are shared The word economics describes and analyzes choices about the way goods and services are produced distributed and consumed It also assesses the consequences of those choices choices Economic activities devoted to satisfying the primary needs of food clothing and shelter are common to all human human beings Economic functions also satisfy people’s desire for goods and services that are not essential but that they choose to buy Such goods and services are often called luxuries luxuries but in most modern countries many luxuries such as automobiles television sets cell phones and visits to the dentist are nonetheless considered necessities The state of the worldwide national and local economies economies has direct effects on everyday people Inflation deflation deflation and unemployment are parts of an economy that affect how much things cost and how much people have to spend Imagine that one day you go to the store to buy your favorite snack which usually costs 1 49 You have the money in your pocket and can’t wait to dig in When you get to the cash register the total for your purchase is 2 29 Why does this snack suddenly cost more How will you be able to afford it if your allowance stays the same or if you lose your after-school job If the economy were going through a period of inflation inflation when you went to the store then that would explain 4 INTRODUCTION

Inflation, Deflation, and Unemployment — page 2 — People must make difficult choices when the prices of goods they typically buy suddenly increase They may decide to buy less often or not at all 55

Inflation, Deflation, and Unemployment — page 3 — Inflation Deflation and Unemployment why the price was higher Inflation makes goods cost more which means consumers have to pay more to buy goods But when things cost more you can buy fewer things During periods of inflation people have to make tough decisions about what to buy In our snack-purchase scenario you may have to buy that snack less often choose an alternative item or skip snack time altogether Deflation far less common than inflation is when prices drop This sounds great in comparison to inflation Imagine the economy is going through a period of deflation The price of your snack might drop to 99 which means you can afford to buy your snack more often Of course if the company that makes the snack has to sell its product for less money it might not be able to afford to employ as many people Unemployment is the condition of being without a job If your parents work at the snack company and they lose their jobs you might lose your allowance Without income you cannot buy any snacks Prices and wages have a direct relationship When prices go up as they do in a period of inflation wages tend to increase as well From a business perspective a company should want to pay their workers enough so that they will be able to buy the company’s products In this way an economy can grow If prices and wages go down however the economy economy shrinks Inflation deflation and unemployment are parts of the economy that directly impact our financial lives 6

Inflation, Deflation, and Unemployment — page 4 — CHAPTER ONE Up Up and Away You have probably heard adults complaining about the prices of various things going up Increasing prices prices seem to be a fact of life A general increase in prices is called inflation Of course prices of selected goods may increase for reasons unrelated to inflation For example the price of fresh lettuce may rise because unseasonably heavy rainfall in California has ruined the lettuce crop Or the price of gasoline may rise if the oil-producing countries countries set a higher price for oil During inflation however all prices tend to rise WHAT CAUSES INFLATION Inflation has many causes but they all operate to raise the demand for goods and services beyond the capacity of the economy to satisfy that demand Heavy government spending 7

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