Inflation – sustained rise in the general
price level or a fall in the purchasing power
Deflation – decrease in the general price
level (Great Depression in 1930s)
Inflation that moves slowly and steadily (1%–4%
Most people consider inflation to be an evil
concept, but most economists believe that an
annual rate of inflation of 1%–4% is not only
good, but also necessary to allow for economic
growth and an expanding population
(advantage); however, it must be carefully
This occurs when inflation starts to get out
of control. (10%, 15% . . .)
The value of the dollar drops more quickly
and prices double faster.
The last time this occurred in Canada was
during the mid-1970s to early 1980s.
Inflation that is out of control (>50% per month)
prices double quickly
money becomes useless
monetary system is likely to be destroyed
economic system becomes chaotic.
This occurs when a population loses all faith in the
If serious inflation becomes a major problem, some
governments will simply print more money to cover the
higher prices which causes inflation to rise even more
The most famous case occurred in Germany, in
the years following World War I.
Inflation began in 1919 and by November of
1923, prices had risen to 1 422 900 000 000
times what they had been in 1914.
The government introduced a new currency that
required 1 trillion units of old money for 1 unit of
In recent years (1980s), Israel, Argentina and
Bolivia have all suffered hyperinflation.
Germany in 1923 when the rate of inflation hit 3.25 × 106
percent per month (prices double every two days).
Greece in 1941-1944, when the rate of inflation hit 8.55
× 109 percent per month (prices double every 28 hours).
Yugoslavia's rate of inflation hit 5 × 1015 percent inflation
between 1 October 1993 and 24 January 1994 (prices
double every 16 hours).
The most severe known incident of inflation was in
Hungary after the end of World War II, peaking at 4.19 ×
1016 percent per month (prices double every 15 hours).
100 Billion 500 Billion
Germany, 1923 Yugoslavia, 1993
1 Milliard (1,000,000,000,000,000,000,000 )
1 x 1021
March 2007 – monthly inflation passed to
50% mark (hyperinflation)
December 2008 – inflation hit 6.5
quindecillion novemdecillion percent - 65
followed by 107 zeros. (Prices double
every 24.7 hours)
January 2009 – issued a 1 trillion dollar
Built in expiry date
Worth 2 loaves of bread
Demand-pull inflation happens when people's
incomes rise, but the amount of goods and
services in the marketplace remain the same.
Since people have more money to spend, they
are willing to pay more for goods and services.
In other words, the total demand will go up,
which will cause prices to rise.
Demand-pull inflation has been described as
"more money chasing the same amount of
Demand-pull Inflation can be represented
by the equation MV=PQ.
M is the amount of money available to spend,
V is the velocity that the money is spent at, in
other words how many times one dollar is
spent as it circulates through the economy,
P is the price of an item,
Q is the quantity of items available in the
If M rises, then mathematically either the
prices (P) must rise, or the amount of
goods (Q) must rise, or the velocity of
spending (V) must go down.
If the money supply increases, and the
amount of goods and the velocity of
spending stay the same, prices will go up.
Prices rise as a result of increased production costs.
Labour costs generally make up the largest portion of the
cost of production of most goods and services.
In trying to improve their standard of living or to protect
themselves from expected inflation, workers will demand
higher rates of pay, causing the production costs to rise
and thus creating a form of inflation.
In general, inflation hurts people.
When prices rise, people can't buy as many things with
People on a fixed income (an income that doesn't
increase when the cost of living goes up) are especially
hurt, since the things they need to survive have
increased in price, but their incomes don't increase.
Businesses are hurt, since they can't invest as much in
the business, and it's difficult to plan for the future if you
don't know what the value of the dollar will be.
Some people are helped, however, and those
people helped are people in debt (people who
If someone borrows money, and inflation causes
the value of money to go down, then the money
they pay back won't be worth as much as when
they borrowed it. They essentially are paying
less money back then they borrowed.