Salt Lake Community College

Impacts of Inflation

Janisa Jenkins
Macroeconomics
Professor Wilson
April 28th, 2016

Have you ever wonder why a single dollar from the 1950s would only
be worth 12 cents today? The movie Cleopatra cost $44 million to create in
1963, but if this figure were converted into todays money it would have cost
about $300 million. These two examples are describing inflation. Inflation
affects every individual. Inflation especially impacts the prices people pay for
products and services, as well as how the value of money saved now could
be different even a year or two later.
Economics is considered a social science, which uses the application of
science to study the relationships between the people and how people will
deal with scarcity within a society. Economics covers a broad amount of
information but is typically broken down into Macroeconomics and
Microeconomics.
Microeconomics generally refers to the study of the relations between
individual markets and consumers. Macroeconomics looks at the economy
as a whole. Macroeconomics focusing primarily on aggregated models, how
much is being saved and consumed along with how much can be invested.
This classification of Economics uses a variety of graphs and equations to
demonstrate the relationship between a number of different factors such as
changes in quantity and how they affect aggregate demand and supply.
There are many variables that can change the outcome of the economy.
Some of the major contributions to changes in the economy include;
unemployment, growth in the economy, public policy, and inflation.

Item
Movie Ticket
Loaf of Bread
Average House
Average Car
Gallon of Gas
Average Salary

1950s
$0.50
$0.16
$16,000
$1,800
$0.20
$3,000

1980s
$3.50
$0.51
$100,000
$6,000
$1
$16,000

2008
$8
$2.50
$200,000
$20,000
$4
$50,000

(Hart, Joyce. 2010. How Inflation Works. New York, NY: The Rosen Publishing Group.)

The simple meaning of inflation is when price levels rise. Inflation

usually hits the economy with a restrained force than unemployment, but
still causes states of instability. When price levels rise the purchasing power
of money is being reduced. It is important to keep in mind that even with
high levels of inflation it will not always affect every different product market
equally. There are a number of different factors or types of inflation.
A demand-pull inflation occurs when the economys production of
services and goods cannot keep up with the amount of spending. A costpush inflation arises when there are sudden and quick price increases to
production materials. These increases in materials will affect costs at any
output driving the cost, price, and inflation upwards. There is also a
relationship between the unemployment rate and inflation. When
unemployment is low, we can assume that people have jobs, are being paid
fairly high, and are making purchases. With this in mind, demand and price
increase which will also increase the inflation rate.
Hyperinflation is particularly devastating to the economy.
Hyperinflation causes business and consumers to come to a halt. They do
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not know what would be considered a fair price to buy or sell their products
and services. This uncertainty causes panic and people begin to lose trust in
money or the medium of exchange. This can lead to implementing the
barter system and if not both, a collapse of the economy. This happened in
Germany right after the First World War.
Deflation occurs when price levels decline. At first, this may sound
like a good thing, but imagine the people who experienced this through their
assets like their homes or stocks.
When inflation occurs especially when multiple forms of inflation
happen at the same time it can cause terrible effects to the individual which
then leads to changes in the market and the entire economy. Unfortunately,
inflation does not affect things equally. For example, during the financial
crisis of 2008, there was a deflation of about 32% to home values. At the
same time, an inflation in oil prices skyrocketed causing barrels of oil to
reach an all-time high and driving gas prices upward. These gas price
increases affected more than just people driving to work. They
encompassed the transportation of food and materials that also drove
production costs up, and in turn drove prices for the consumer up.
There are times when inflation can be beneficial for the individual
consumer. When someone purchases a house and is able to sell it at an
increased value they benefited from inflation. Inflation is also beneficial to
people paying back debts or loans. People end up paying back a loan with

money that is no longer as valuable when it was loaned out. This helps put
more money back into the economy because it encourages lending and
borrowing.
The effects of inflation and interest rates can affect exports and
imports. Imports allow people to have more choices of products. They also
may allow for cheaper options that help keep cost down and therefore the
price to the consumer down. They generally impact changes to the exchange
rate. Generally, a higher inflation will lead to higher interest rates, but there
is not always a straight answer if it will lead to a stronger or weaker currency.
When someone has a stronger domestic currency it can have
opposing effects on exports and change the balance of trade. The higher
inflation will also have an effect on exports because it directly changes the
costs of labor or materials. If there are high costs than, exports will have a
harder time with competitors in the international trade environment.
The types and amount of inflation can greatly impact our economy
from an individual standpoint as well as the whole nation. There are times
when inflation can be very devastating. Where multiple types at varying
levels can cause chaos to the entire system. There are also times where
inflation can be beneficial for companies and for consumers. When inflation
is controlled it can be a useful tool for stimulating the economy and
diminishing recession affects. Inflation may also increase wages for
employees, and even help lessen the real amount of debt.

Works Cited
Amadeo, Kimberly. "How Does Inflation Impact My Life?" About.com
News & Issues. About.com, 7 Apr. 2016. Web. 27 Mar. 2016.

Bernholz, Peter. 2003. Monetary Regimes and Inflation. Northampton,

MA: Edward Elgar Publishing.

Hart, Joyce. 2010. How Inflation Works. New York, NY: The Rosen
Publishing Group.
Investopida Staff. "Interesting Facts About Imports And Exports |
Investopedia." Investopedia. Investopedia LLC, 2013. Web. 27 Mar. 2016.

Mcconnell, Campbell R., Stanley L. Brue, and Sean M. Flynn.

Macroeconomics-Principles, Problems, and Policies. 20th ed. New York:
McGraw-Hill Education, 2015. Print.