Exploring Inflation

1. Prices transmit much of the information on which decisions are based in a price system, and when prices are constantly changing as they do during inflation, the information that they contain becomes more difficult to use. The human mind can only coordinate and analyze a limited amount of information. When there is inflation, one must include not only the price of an item but also the date of that price in the calculations that lead to a decision. By increasing the information and the calculation needed to make good decisions, inflation will make good decisions more difficult to make. If there are fewer good decisions, the performance of the economy will suffer.

a) Assume that there is no inflation. Ingrid G has observed these prices for a type of canned fruit over the past four months: $.49, $.55, $.45, and $.52. She now sees a price of $.44. At this price is the fruit a good buy? Explain.
b) Assume that the price level is rising at 5% a month and that everyone knows this. Ingrid G has seen these prices over the past four months: $.49, $.58, $.50, and $.60. She now sees a price of $.53 for this product. At this price is the product a good buy? Explain how you get your answer.
c) Some economists have argued that if inflation is perfectly foreseen, there are virtually no costs to inflation. Will Ingrid G agree with them?

2. Prepare a short (one paged, typed, single-spaced) paper to turn in and a two minute presentation for the class on one of the following items. (Be sure to include references to the specific resources you used, including urls for anything from the Internet.)

(Some guidance: Not all sources are reliable, and on the Internet the problem unreliable and biased sources is ever present. Any loonie can set up a web site and broadcast his point of view. Always try to figure out what the point of view of the source is before you use it.)

a Germany had an awful episode in hyperinflation in 1921-23. Search for hyperinflation on the internet. What interesting things can you find about it?

b. Do people sell German currency from the hyperinflation on eBay? If they do, how much does it cost? Are there other artifacts from that period for sale? What other kinds of paper money are for sale on eBay?

c. Hjalmar Schacht's highpoint was probably his role in stopping the German hyperinflation, but he had adventures after that. You can find them if you search for Hjalmar Schacht on the Internet. What did you find about him?

d. Look at Time or Newsweek for 1979. How much was written about inflation? How much of a problem was it considered? What did people see as the cause of the inflation? What remedies were suggested? Did people expect the problem to be fixed?

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