Chapter 5

Facing the Fact of Increasing Prices: Inflation

IN THIS CHAPTER

Understanding how economists calculate inflation

Seeing why printing more money causes inflation

Recognizing that inflation can be a curse and a blessing

Experiencing the extreme poles of hyperinflation and deflation

Grandparents and other baby boomers often talk about the good old days. And it’s true, a lot of things were a lot cheaper. In the early 1950s, it cost less than $0.50 to see a first-run film. Now it may cost $10 or more. Similarly, a McDonald’s hamburger cost $0.15 in 1955, compared with $1.35 today (your local price may vary). A gallon of gasoline was under $0.25 in the 1950s, and the price of the average new house was $22,000. For these, as for virtually all other goods, the last 60 years has seen prices rise by ten-fold or more.

Yet why the prices of things tend to rise over time isn’t at all obvious. Why can’t prices fall or even stay roughly constant? In modern times, what about prices causes them to go up over time in almost all countries? These questions are just some of the ones that macroeconomists attempt to answer.

remember The increase in the average level of prices in an economy is called inflation. It’s one of those topics in macroeconomics that affects everybody and about which almost everyone has an opinion. Inflation is also a subject that confuses a lot of people, not least because ...

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