Inflation 2.3B

IB Syllabus Requirements:

Macro Objective: Low and stable rate of inflation

• Explain the concepts of inflation, disinflation and deflation.

• Explain how inflation is measured

• Explain the problems in measuring inflation

• Explain and illustrate the causes of inflation

• Evaluate measures that may be taken to reduce inclation

• Distinguish between "good" deflation and "bad" deflation

• Explain the costs of deflation

HL Requirements:

• • Calculate a weighted price index

  • Explain and Illustrate the short-run Phillips curve

  • Explain the concept of the natural rate of unemployment

  • Evaluate the extent to which there might be a trade-off between inflation and unemployment.

Part 3: Costs of Inflation and Deflation

Goals for the Day:

Consequences of inflation

• Discuss the possible consequences of a high inflation rate, including greater uncertainty, redistributive effects, less saving, and the damage to export competitiveness.

Consequences of deflation

• Discuss the possible consequences of deflation, including high levels of cyclical unemployment and bankruptcies.

5. Part 5 – Costs

Draw an example for each of the costs of inflation and deflation (x6)

Deflation

Complete “2.3B – Part 1 - Historical Perspective for Ch 10”

Inflation – Zimbabwe’s Prices

Complete “2.3B – Part 2 - Zimbabwe’s Prices Rise 900%”

Day 3: Causes of Inflation

Goals for the Day:

Types and causes of inflation

• Explain, using a diagram, that demand-pull inflation is caused by changes in the determinants of AD, resulting in an increase in AD.

• Explain, using a diagram, that cost-push inflation is caused by an increase in the costs of factors of production, resulting in a decrease in SRAS.

• Evaluate government policies to deal with the different types of inflation.

Real Stories of Inflation in the news: Find an article that relates to inflation. Note the causes of inflation and potential measures that are being done, or could be done to address it.

HL Requirements:

• • Calculate a weighted price index

  • Explain and Illustrate the short-run Phillips curve

  • Explain the concept of the natural rate of unemployment

  • Evaluate the extent to which there might be a trade-off between inflation and unemployment.

India Reduces Rate of Inflation

1. What is the cause?

2. draw a diagram

3. Potential solutions? Diagram them. Drawbacks?

4. overall evaluation

Now find videos or articles with examples of inflation and deflation and answer the same questions. Work alone or with a partner but be prepared to share out.

Examination Questions

Paper 1, part a questions (10 marks):

1. Explain the concept of demand-pull inflation.

2. Explain the concept of cost-push inflation.

3. Explain the monetarist explanation of inflation.

4. Explain three consequences of inflation.

5. Explain three consequences of deflation.

6. Explain three problems involved in the measurement of inflation.

HL: Explain why there may be a trade-off between inflation and unemployment in the short run.

Paper 1, part b questions (15 marks):

1. Using real-world examples, evaluate methods that might be used to reduce inflation.

2. Using real-world examples, discuss the extent to which demand-side policies are effective in reducing inflation.

3. Using real-world examples, discuss the potential conflict between low inflation and low unemployment.

4. HL only: Using real-world examples, discuss the Phillips curve in terms of the trade-off between inflation and unemployment.