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4.2 Inflation & the Consumer Price Index

4.2 Inflation & the Consumer Price Index
  • Math Help

    According to The Economist, devaluation is "a sudden fall in the value of a currency against other currencies. Strictly, devaluation refers only to sharp falls in a currency within a fixed exchange rate system." (An exchange rate is the price at which one currency can be converted into another.) "Also, devaluation usually refers to a deliberate act of government policy, although in recent years reluctant devaluers have blamed financial speculation. Most studies of devaluation suggest that its beneficial effects on competitiveness are only temporary; over time they are eroded by higher prices."

    Download the spreadsheet used in Example 5 to see how the value of the dollar has changed since 1931.

  • Consumer Suggestion

    Check out the "Value of a Dollar Project" by photographer Jonathan Blaustein, which features a photographic narrative "about how Globalization and Commodification are impacting society in the new millennium." His first installment in the series features photographs of the quantity of food that $1 will purchase in different countries around the world.

  • Checkpoint Solution

    Devaluation of the dollar causes inflation and causes people's possessions and companies' assets to be worth more nominally. Most economists agree that some inflation is necessary and some think that intentionally devaluing the dollar will help improve the economy.

  • Comments (2)

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    system user
    Guest   1 decade ago |
    I wish I was living in an era with no inflation.
    system user
    Ron Larson (author)1 decade ago |
    During the Great Depression of the 1930s, both of my grandfathers were farmers in North Dakota. Both kept their cash at home. From the graph in Example 5, you can see that this was a reasonable strategy, especially during a time when banks were failing. During times of inflation, however, this is not a good strategy. Each year, the cash you have stored will be worth less.