Inflation -- Assessment

1. Compare the prices of market baskets of goods in 1980 with similar prices today. Explain how inflation reduces purchasing power for people whose income is fixed or increasing slower than the rate of inflation.

2. Determine the current price for a pair of designer sunglasses that cost $50 in 1982-84, assuming the price has increased at the average rate of inflation. (This link gives you a cool way to calculate this: http://minneapolisfed.org/research/data/us/calc/)

3. For each of the following cases, tell who would be harmed by an unexpected 10% inflation rate, who would benefit, and explain why:
a. Mike's retirement income is $24,000 per year
b. Bonnie borrowed $5,000 last year and will be paying it back at the end of this year.
c. John lent the $5,000 to Bonnie last year and will be paid back at the end of this year.
d. Bob and Mary bought several houses as an investment 10 years ago, and now they plan to sell them
e. Businesses selling consumer products such as clothing or food.

4. Identify assets people can buy to protect themselves financially against inflation and discuss how much time people spent with this problem in times of high inflation (e.g. 1981) compared with times of low inflation (e.g. 1955)