[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Chapter 23
THE COST OF
LIVING AND
INFLATION
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In the 1920s, the years of silent pictures, a movie ticket cost a nickel. By the
late 1940s, in the heyday of the Hollywood studios, the price was up to $0.50.
In the 1960s, the price of a movie was $2.00, and now it is more than $8.00.
This steady rise is no anomaly. Most other goods have undergone similar price
increases over time. This increase in the general level of prices is called inflation.
While unemployment tends to be concentrated in certain groups within the population,
everyone is affected by inflation. Thus, it is not surprising that when
inflation becomes high, it almost always rises to the top of the political agenda.
Ensuring that inflation remains low and stable is one of the key goals of macroeconomic
policy. In this chapter, you will learn about the costs of inflation and why
it is desirable to make sure that inflation remains low. You will also learn about the
price index that is used to measure the cost of living. Finally, the chapter ends with
a review of American’s experience with inflation.
The Costs of Inflation
It is not inflation if the price of only one good goes up. It is inflation if the prices of
most goods go up. The inflation rate is the rate at which the general level of prices
increases. When inflation is positive—that is, the average price level is rising—a
dollar buys less and less over time. Or, to put it another way, it takes more and more
dollars to purchase the same bundle of goods and service. While the costs of unemployment
are apparent—it causes not only a loss in output but also the misery of
those who cannot secure gainful work—the costs of inflation are more subtle.
People sense there is something wrong with the economy when there is high
inflation. Workers worry that paychecks will not keep pace with price hikes, a failure
that will erode their standard of living. Investors worry that the dollars they
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