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What causes inflation?

Key Economic Concepts:

• Demand
• Incentive
• Inflation
• Markets
• Price
• Supply

Description:

This lesson explores different types of inflation and terms associated with this economic concept. You may have heard relatives talk about the good old days when a dollar would buy something. What happened to that dollar? Why won’t it buy as much as it did last month or last year? What happened is inflation. In this lesson you will examine the various causes and theories of inflation as well as how it affects different groups in the economy such as savers, lender, and people living on fixed incomes.

Lesson Objectives:

Students will:

• Identify the main theories of inflation
• Understand main terms associated with inflation
• Compare different theories of inflation

Introduction:

This lesson will explore types of inflation and terms associated with this economic concept. You may have heard relatives talk about the good old days when a dollar would buy something. What happened to that dollar? Why won't it buy as much as it did last month or last year? What happened is inflation. In this lesson we will examine the various causes and theories of inflation as well as who is responsible for tracking it.

You may want to use the lessons below before starting this lesson. They will provide students with proper background information on inflation and the CPI.

www.econedlink.org/lessons/index.php?lesson=EM255&page=teacher

www.econedlink.org/lessons/index.php?lesson=EM227&page=teacher

Resources:

• "Inflation" is available at:
  www.socialstudiesforkids.com/articles/economics/inflation1.htm ^[1]

• "What Goods and Services Does CPI Cover" is available at:
  www.bls.gov/cpi/cpifaq.htm#Question_7 ^[2]

• "Theory 1 - Demand-pull inflation - is inflation demanding?" is available at:
  www.bized.co.uk/virtual/bank/economics/mpol/inflation/causes/theories1.htm ^[3]

• "Theory 2 - Cost-push inflation - is inflation pushy?" is available at:
  www.bized.co.uk/virtual/bank/economics/mpol/inflation/causes/theories2.htm ^[4]

• "Theory 3 - Quantity theory of money - in theory what quantity would you like?" is available at:
  www.bized.co.uk/virtual/bank/economics/mpol/inflation/causes/theories3.htm ^[5]

Process:

Use the following slide show presentation to introduce the various causes of inflation.

Causes of Inflation Slide show 

Next, provide the students with copies of these two study guides: Study Guide #1 and Study Guide #2.

Teachers' versions of the study guides are provided here: Teacher Study Guide #1 and Teacher Study Guide #2.

To complete study guide #1, the students will need to read this Web site:
www.socialstudiesforkids.com/articles/economics/inflation1.htm ^[1]

To complete study guide #2, the students will need to read these Web sites:

Part #1: www.bls.gov/cpi/cpifaq.htm#Question_7 ^[2] .

Part #2: www.bized.co.uk/virtual/bank/economics/mpol/inflation/causes/theories1.htm ^[3] .

Part #3: www.bized.co.uk/virtual/bank/economics/mpol/inflation/causes/theories2.htm ^[4] .

Part #4: www.bized.co.uk/virtual/bank/economics/mpol/inflation/causes/theories3.htm ^[5] .

Conclusion:

Inflation has remained in check for much of the past three decades. As a result, prices of goods and services have remained relatively steady. However, we must be on the lookout for factors that can lead to periods of high inflation. Prices of goods and services will rise. The rise may be caused by demand exceeding supply, or because the cost of making goods and services rises and that cost gets passed on to the consumer, or because it may be that there is too much money in the economy. Whatever the reason, or combination of reasons, we can expect some inflation in our economy.

Assessment Activity:

Online Assessment Activity

Here are the questions that will appear on the Online Assessment Activity.

1. According to the Quantity Theory:
   a. Inflation occurs because there is not enough money in the economy.
   b. Inflation occurs because demand exceeds supply for goods and services.
   c. [Inflation occurs because there is too much money in the economy.]
   
2. The cost-push theory of inflation states that:
   a. Inflation occurs because there is not enough money in the economy.
   b. [Inflation occurs because the costs of producing goods and services go up and are then passed along to the consumer.]
   c. Inflation occurs because there is too much money in the economy.
3. Which of the following best describes the demand-pull theory of inflation?
   a. [Inflation occurs because demand exceeds supply for goods and services.]
   b. Inflation occurs because the costs of producing goods and services go up and are then passed along to the consumer.
   c. Inflation occurs because there is too much money in the economy.
4. Purchasing power describes what happens to our ability to buy goods and services when prices...
   a. fall due to inflation.
   b. [rise due to inflation.]
   c. rise due to deflation.
5. True or False? The market basket is a combination of goods and services that the BLS uses to track changes in the general price level. These are items that an average family will spend money on in a given month.
   a. [True]
   b. False

Extension Activity:

Assign the students to write an essay comparing and contrasting the causes of inflation. In their essays, the students should use the information they used to complete the process section.

Answers will vary:
Students should provide an analysis of the various types of inflation and theories behind them.

Links Used:

1. ^{^ ^} "Basic Economics: Inflation" - (www.socialstudiesforkids.com) Provides a good explanation of inflation for students.
2. ^{^ ^} "Consumer Price Indexes" - (www.bls.gov) This page provides an answer to a frequently asked question about the CPI.
3. ^{^ ^} "Theory 1 - Demand-Pull Inflation - Is Inflation Demanding?" - (www.bized.co.uk) This Bank of Biz/ed page explains causes of inflation.
4. ^{^ ^} "Theory 2 - Cost-Push Inflation - Is Inflation Pushy?" - (www.bized.co.uk) This Biz/ed site discusses inflation.
5. ^{^ ^} "Theory 3 - Quantity Theory of Money - In Theory What Quantity Would You Like?" - (www.bized.co.uk) This Biz/ed site discusses inflation.

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