Standard VI.C.3: Adjusting for Inflation, Hyperinflation

Introduction to Inflation: When does it make sense to burn large amounts of money?

Inflation remains one of the most challenging subjects in all of economics. The concepts, the models, and the math are no more complex than most other economic content, but the habit of thinking in terms of dollars is one that is so deeply ingrained for us that even established economists often fall into the trap when not appropriate. Yet inflation is a rich topic in any economics course, and having a strong understanding of inflation is an indispensable part of understanding economic conditions and the effects of policy. Why is this? At the outset, keep an important point in mind: Regardless of the what we call it (inflation, the value of the dollar, cost of living, purchasing power, etc.) the underlying connection is prices. This is a market system, which we also refer to as the "price system." When inflation occurs (especially when unexpected), price signals are distorted because 1) not all prices are effected the same by inflation 2) it takes time for households and firms to realize what is happening 3) the relationship between different prices formed by the market can get thrown off. If we compare the knowledge-coordinating price system to a group of friends trying to plan a holiday vacation, inflation is like the gossiper that calls each person to give inaccurate and inflammatory information about how much different options cost, who wants to room with who (or not), and suddenly demands that the vacation be to a destination beyond everybody's budget.

Learning Activities:
Dollar Figures from Different Times

Remediation Checklist:
  • Re-read text.