Inflation, Deflation, and Unemployment

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

Inflation, Deflation, and Unemployment — page 5 — Title Changes in food prices which are often caused by forces beyond anyone’s control affect people’s day-to-day spending spending may lead to inflation Governments can create inflation because they are able to print money When a government pays its bills by printing money rather than by raising taxes the demand for goods and services increases If demand is already high increasing it will only push up the prices of those goods and services The government may not be the only player in the inflation scenario Citizens through their voting power can encourage the government to follow inflationary policies In the United States special interest groups often exert pressure pressure on Congress for programs that will benefit them at the expense of the treasury Few taxpayers actually ask their congressional representatives to raise taxes Government 8

Inflation, Deflation, and Unemployment — page 6 — Up Up and Away Germany After World War I Wartime is often a productive time for an economy Busi nesses rush to supply armies with what they need creating jobs for civilians and putting more cash into circulation Instead of raising taxes to pay for World War I Germany borrowed money Prices rose during the war The Treaty of Versailles a peace document signed after they lost the war required Germany to pay costly reparations Prices rose again and the government responded by printing more money By 1923 the German mark which had been equal in value to other European currencies was nearly worth less There are numerous stories about people filling wheelbarrows full of bills to buy a single loaf of bread or using money to wallpaper Massive inflation such as that in Germany after World War I can cause paper currency to lose its value The Rentenmark was introduced to help the nation’s recovery continued on the next page 9

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