CAUSES AND EFFECTS OF INFLATION

When the general level of prices rises, the economy is experiencing

inflation. A decline in the general level of prices is called deflation. Both
situations are harmful and should be avoided.

DIRECTIONS: Each item below is either a cause or an effect of

inflation. (One item is both.) Copy each item in the correct column in the
following chart.

CAUSES EFFECTS

1. Consumers, businesses, and

1. Higher prices force workers
governments try to buy more
to ask for higher wages.
goods and services than the
economy can produce.

2. The federal government

3. Interest rates go up and
spends more money than it
spending on automobiles and
collects in revenues.
houses falls

4. The Federal Reserve System 5. The cost of a raw material

increases the money supply such as oil unexpectedly
faster than the increase in the increases.
Gross Domestic Product.

6. The dollar buys less, and 7. Loans are repaid in dollars

people on fixed incomes have with less purchasing power
decreased purchasing power. because they buy less

8. The cost of labor goes up 9. People speculate heavily to

because the labor market is take advantage of rising
tight. prices.