Inflation, Deflation, and Unemployment

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

Inflation, Deflation, and Unemployment — page 7 — Inflation Deflation and Unemployment continued from the previous page their homes because it cost less than buying wallpaper People’s life savings were now worthless Inflation finally halted under new leadership and a new stable currency called the Rentenmark However the country suffered the effects of an unstable government government and economy which left people vulnerable and angry This was the perfect time for a new political party to gain new followers and power the Nazi party deficits in themselves do not necessarily lead to inflation but they make it more difficult to prevent inflation or to slow it down Demand-pull inflation is one of the most common types of inflation In this scenario the demand for goods is greater than the supply available Imagine you run a lemonade stand You only have one glass left but five people want it Are you going to charge the same price you’ve been charging all day or will you raise it knowing knowing that someone will pay more Most business owners would decide to charge more The next day when you make more lemonade you will probably keep charging the higher price because you know your customers will pay it 10

Inflation, Deflation, and Unemployment — page 8 — Up Up and Away Cost-push is another inflation When type of the available supply of a good goes down but there is still a demand for it prices increase Natural Natural disasters such as hurricanes hurricanes can cause this type of inflation If a hurricane ruins crops and causes a shortage of lemons in your area you would charge more for your lemonade The increase in prices would help you buy the now more-expensive more-expensive lemons which would have to be delivered from farther locations People often try to Prices fluctuate for all goods even simple ones like lemonade on the basis of how many are available and how badly people want to buy them protect themselves from the effects of inflation which can contribute to rising prices Consumers want their incomes to increase so as to keep up with rising prices Rising wages tend to force up prices still further Those who lend money expect to be paid back in inflation-adjusted dollars Retired people want their Social Security and other pension payments payments to increase with the cost of living As inflation continues 11

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