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Basic Economics: Inflation


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• Part 2: A Bigger Scale

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Part 1: The Price of a Candy Bar

One of the concepts of economics most talked about by adults is inflation.

Simply put, inflation is a rise in prices relative to money available. In other words, you can get less for your money than you used to be able to get.

Here's an example:

You buy a candy bar for 50 cents. A year later, you go to buy the same candy bar and it's 55 cents. You still have only 50 cents, but the price of the candy bar has gone up. We can say that inflation is at work. The price of that bar has been inflated.

People usually refer to inflation when they talk about the prices of large-ticket items, like cars and houses and stocks. But inflation also affects things like groceries and house supplies. It can also affect things like house payments and rent.

When inflation rises but people's paychecks don't, this means that people have spend more of the money to buy the same things that they used to be able to buy for less.

Let's go back to the candy bar. You could also say that if you had only 50 cents, you could get only a percentage of that candy bar. In that case, that would be 5/6. Now, the store probably wouldn't let you buy only 5/6 of a candy bar anyway, but you can see the point: You have only 5/6 of what that candy bar now costs. Your money supply hasn't changed, but the price of what you want has. That's inflation.

Next page > A Bigger Scale > Page 1, 2

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