Inflation Versus the Price Level
Summary
CollapseContext for Use
Overview
Macro principles students often are confused on the difference between inflation and the price level. This activity helps students understand the difference between the two.
Expected Student Learning Outcomes
Students will have a better understanding of the inflation rate and the price level are separate and distinct concepts.
Information Given to Students
Inflation vs. the Price Level (Microsoft Word 2007 (.docx) 11kB Jul19 18)
Say that inflation fell. Then the price level (measured by the CPI or GDP deflator) would be sure to fall as well.
A. true (I'm sure)
B. true (I think)
C. not sure
D. false (I think)
E. false (I'm sure)
Teaching Notes and Tips
Note that in the answers students are asked how sure they are of their answer. This is an example of a "metacognitive activity." Typically, experts monitor their thinking continuously -- "Does this make sense? Is this like similar problems?" while novices typically do not. Thus, these qualifiers encourage students to think about the topic at hand in a deeper way than they typically do.
To conclude the activity, it will help to give a numerical example. One might have the CPI growing from 100 to 104 to 106. The inflation rate falls from about 4% to 2%, but the CPI is still growing. One might also use the analogy of a slowing car (akin to disinflation) to a car that was moving forward, but stops and goes in reverse (akin to deflation). Also, one might describe how a child grow very quickly when young and has short stature -- there is a distinct difference between the level (height) and rate of change (how quickly the child is growing). Clearly, deflation and disinflation should be mentioned. It might also be a good idea to mention expansions and recessions as students might mix up expansions and inflation.