Politicians and economists the world over complain about inflation, but what exactly is it? In broadest terms, inflation is a general increase in price levels. As inflation decreases, so too do the price of all goods in an economy. The value of currency, and thus prices for all goods, used to be tied to the value of gold. However, since the worldwide abandonment of the gold standard inflation has become a lot more complicated. Read on to learn about inflation and some of its many real-world implications. Keep your checkbook handy!
By analyzing questions, you can see patterns emerge, patterns that will help you answer questions. Qwiz5 is all about those patterns. In each installment of Qwiz5, we take an answer line and look at its five most common clues. Here we explore five clues that will help you answer a tossup on Inflation.
CONSUMER PRICE INDEX AND THE WHOLESALE PRICE INDEX
Price indices are one of the primary ways to measure inflation. The wholesale price index measures the rate of inflation by tracking changes in prices of goods before they enter the market. Thus, the wholesale price index is producer-focused. Once goods are in the market, statisticians from the Bureau of Labor Statistics combs American metropolitan areas to determine the Consumer Price Index (CPI). The CPI measures inflation by tracking changes in the prices consumers pay.
PHILLIPS CURVE
The Phillips Curve is one of the most famous economic concepts related to inflation. The Phillips Curve theorizes that inflation and unemployment are inversely related. If one of these factors increases, the other decreases. Widely accepted through the 1960s, the Phillips Curve lost credibility in the 1970s with the onset of stagflation: increasing unemployment coupled with high inflation.
COST-PUSH AND DEMAND-PULL
Milton Friedman claimed that “inflation is always and everywhere a monetary phenomenon.” Monetary policy may shape inflation, but that’s not the only thing. Cost-push and demand-pull inflation are two factors that drive inflation. Cost-push inflation occurs when a country’s volume of goods and services (also called aggregate supply) decreases. Conversely, demand-pull inflation happens when the demand for goods exceeds their supply.
GORDON’S TRIANGLE MODEL
A revision of the Phillips Curve in light of stagflation, Robert Gordon’s Triangle Model of Inflation does away with the simpler, inverse relationship between inflation and unemployment. The Triangle Model argues that inflation arises from three factors. These three factors are cost-push inflation, demand-pull inflation, and something else called inertia. Inertia is the level of inflation currently in the system.
FISHER EQUATION
The Fisher Equation is commonly used by investors and lenders. It states that the nominal interest rate equals the sum of the real interest rate PLUS inflation. The nominal interest rate is the interest rate on a loan or investment before taking inflation into account. The real interest rate takes inflation into account.
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Quizbowl is about learning, not rote memorization, so we encourage you to use this as a springboard for further reading rather than as an endpoint. Here are a few things to check out:
* Why does every economist fear stagflation? Find out here.
* If you ever wanted to find out if you’d be considered a millionaire 100 years ago visit the US Inflation Calculator!
* Extremely high, accelerating inflation is known as hyperinflation. Read this article for some hyperinflation horror stories.
* For an easily digestible primer on the magic world of paper money, check out this video!
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