Inflation

Inflation

• More money ► Increases demand 

• more money ► more spending

• Supply has not changed

• Prices go up — but why?

Non-Inflation Scenario:

• 100 Customers

• 100 Watermelons

Inflation Scenario

• 1,000 Customers

• 100 Watermelons

• Customers must compete — not with violent weapons

• The weapon is money — the most $ wins …or the highest bidder

Why did the number of Customers increase?

• Money was added to the economy

• How?

• The Federal Reserve (The Fed) = Banker’s Bank

• This where money starts

• The Fed Loans to banks

• Banks loan to people

Interest Rates (cost of taking a loan)

• High = less borrowing

• Low = more borrowing

• More borrowing ► more $$$ ► more spending (customers competing)

• Inflation = Prices go up

Why cause inflation?

• Less borrowing ► less $$$ ► less spending

• Less business action ► need fewer workers ► less spending 

• Economy shrinks (bad)

• More borrowing ► more $$$ ► more spending (customers competing)

• Economy grows (good)

• RULE: Don’t print too much money (inflation)

• Don’t keep interest rates low for too long