What Is Inflation

The lesson provides an overview of the concept of inflation. The main objectives of the lesson are to define inflation, understand how and why the government inflates the currency, and examine the impact of inflation on bonds and stocks. The lesson begins by explaining what inflation is and the stories often heard about it. It then delves into the reasons why the government inflates the currency, including protection from economic recession or depression and indirect taxation. The main factor causing inflation is an increase in the supply of money.
The lesson uses an example of a kid named David to help illustrate how inflation occurs. David performs some work, is paid with $4, and then goes to buy milk. The cost of milk in 2012 is $4, but in 2013, the cost has risen to $4.12. The rise in the cost of milk is due to the government putting more money into the system, which affects the value of each dollar. The Federal Reserve, or the Fed, controls the amount of money in the system by setting the reserve ratio and through banks, who lend out the money saved in accounts.
In conclusion, inflation occurs when there is an increase in the supply of money, which affects the value of each dollar. The Fed controls the amount of money in the system and affects the cost of goods and services, which leads to inflation. Understanding inflation is important for financial planning and decision-making.