Answers to questions as they were in July,
2006
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?
When you deflate the prices in part b, they become the prices in part a. Most people do not find that immediately obvious. The point of the example is that it is easier to do price comparisons over time when prices are not changing.
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.)
Many students have a very poor grasp of history and history is important in economics. These are little exercises that attempt to improve their grasp of history.
(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 a 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?
3. 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. Search the Internet for Hoovervilles. Find something interesting to tell the class. (Make sure you include your sources in your paper. Also, can you determine who wrote the material in your source, and what point of view they bring to their writing?)b. Search the Internet for "Bonus Army March" in 1932. What happened?
c. Search the internet for "Banking Holiday" 1933. What can you tell the class about what you find?
d. Search the internet for "Black Thursday" 1929. What can you tell the class about what you find?
e. The U.S. banking system collapsed in March of 1933. All banks were shut down from March 6 through March 13. What did the press at the time say about this? Go back to old issues of the New York Times or Time magazine and see what the people of the time were reading.
f. The stock market crash on October 24, 1929 seems to be important to many people looking back at the early part of the Great Depression. What did the press at the time say about it? Go back to old issues of the New York Times or Time magazine and see what the people of the time were reading.
g. (If you have access to a library with this resource) Pick a date between 1931 and 1935. Go to the library and find the New York Times for that date. (It may be on microfilm--the librarians will be happy to help you--hardly anyone ever uses microfilm, and it makes their day when someone actually does use it.) Find three stories that are in the headlines on that date and summarize them in a paragraph each. Then write one paragraph telling what you found most different from the 1930s and today.
h. In the years since the Great Depression, many explanations have been put forward to explain this economic disaster. The dominant view of banking in the 1920 was the Commercial Loan Theory of Banking which is also called the Real Bills Doctrine. It argued that as long as banks made only sound business loans, the right amount of money would be in circulation and the economy would run smoothly. Loans made for the wrong purposes, such as stock market speculation, would cause problems. People who stress the importance of the stock market crash as a cause of the Great Depression probably do not realize the origin of their view, but without the Real Bills Doctrine, the concern over the stock market crash would never have existed.
Search for Google.com for "causes of the Great Depression." Can you find sites which stress the stock market crash as a cause of the Great Depression? Summarize what they say and provide urls.
i. In the years since the Great Depression, many explanations have been put forward to explain this economic disaster. The underconsumptionist view, that production outran the ability of people to buy, was once very popular and is still alive, though it is more likely to be held by noneconomists than economists. The extreme form of the underconsumptionist view was the secular-stagnation view. It argued that the forces of production had permanently outrun the ability of people to purchase output, so depression was inevitable. (The Leninist view of imperialism, popular with 20th century Marxists, developed from the secular-stagnation view but made major changes.) You can find these views in some of the interpretations of the Great Depression that are available on the internet. It is not quite as popular as the stock-market speculation arguments, but it is at the heart of the arguments that stress the unequal distribution of wealth and the rapid technological progress of the 1920s.
Search the internet for causes of the Great Depression and see if you can find examples of the underconsumptionist view. (Caution--There is very little good economics on these sites. Do not take their explanations as true--rather consider them interesting as examples of a way of thinking.)
j. In recent years, economic historians have come to believe that Federal Reserve policy and/or the gold standard played important roles in causing the Great Depression. Search the internet for causes of the Great Depression and see if you can find examples of the explanations that stress either monetary policy or the gold standard as causes of the Depression.
1. The Department of Labor explains how the unemployment rate is computed at: <stats.bls.gov/cps/cps_htgm.htm>. How well did the reading explain the process? Was there anything important that was left out?
Internet exploration--answers will vary.
2. The reading presented U.S. unemployment data for 1982. Although 1982 was an interesting year, it was a long time ago. What would this table look like with current data? You can find unemployment data in several places. One is <stats.bls.gov/eag/eag.us.htm>. (You may have to click a button or two to get the data you need.)
a. Update the table in the reading selection with the most current
data.
b. What has been happening to unemployment during the past year?
Internet exploration--answers will vary.
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4. The reading explained how to measure inflation with the CPI, but it never told us what the CPI is telling us about inflation today. You can get recent data on the rate of inflation at several places on the Web. One is <stats.bls.gov/eag/eag.us.htm>. (You may have to click a button or two to get the data you need.
a. By how much has the price level risen in the past year?
b. Does it appear that inflation is increasing or decreasing?
c. There are two different versions of the CPI, the CPI-W and the CPI-U. How do they differ. Are they given the same readings on price change?
Internet exploration--answers will vary.
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9. The reading explained what GDP tries to measure, but it did not tell us what the recent numbers are. You can find these numbers in several places on the web, such as at the Federal Reserve Bank of St Louis, which keeps lots of data at <http://www.stls.frb.org/fred/index.html>, or at the Bureau of Economic Analysis in the Commerce Department, <http://www.bea.gov/> or <http://www.bea.gov/bea/glance.htm>
What are the most recent data for nominal and real GDP?
What does the GDP deflator say is happening to the rate of inflation?Internet exploration--answers will vary.
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11. We saw that Leading Indicators are a cheap and easy way to forecast the economy. (They are not always right, but they are cheap and easy.) You can find the current data for the Leading Indicators on the web in a number of places. The Leading Indicators are published by a private group called the Conference Board <http://www.conference-board.org/>.
What do the Leading Indicators say is going to happen to the economy?
The Conference Board also publishes a series called the Consumer Confidence Index. Are people feeling confident today about the economy, or do they have doubts?
Internet exploration--answers will vary.