True or False: Find Out What You Actually Know About Inflation
1. Inflation measures price increases in goods and services over time
Answer: True. The Fed says, "Inflation is the increase in the prices of goods and services over time."5
2. Inflation can be measured by an increase in the cost of one product or service
Answer: False. The Fed says, "Inflation cannot be measured by an increase in the cost of one product or service, or even several products or services. Rather, inflation is a general increase in the overall price level of the goods and services in the economy."5
3. Inflation is caused by insufficient goods and services to meet the high demand and growing money supply
Answer: True. The Fed says, "Inflation is caused when the money supply in an economy grows at a faster rate than the economy's ability to produce goods and services."6
4. When inflation is high, the Federal Reserve typically lowers interest rates
Answer: False. The Fed says, "When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down. When inflation is too low, the Federal Reserve typically lowers interest rates to stimulate the economy and move inflation higher."7
5. The Federal Reserve strives to achieve a long-term inflation rate of 3% to 5% to maximize employment and keep prices stable
Answer: False. It's 2 percent. The Fed says, "The Federal Open Market Committee (FOMC) judges that inflation of 2% percent over the long run is most consistent with the Federal Reserve's mandate for maximum employment and price stability."5
6. Suppose the prices of things you buy double over the next 10 years. If your income also doubles, you will be able to buy more than you can buy today
Answer: False. If both your income and prices double in 10 years, you'll be able to buy the SAME as you're able to buy now (not more or less).8
7. Inflation that is too low can weaken the economy
Answer: True. The Fed says, "When inflation runs well below its desired level, households and businesses will come to expect this over time, pushing expectations for inflation in the future below the Federal Reserve's longer-run inflation goal. This can pull actual inflation even lower, resulting in a cycle of ever-lower inflation and inflation expectations. If inflation expectations fall, interest rates would decline too. In turn, there would be less room to cut interest rates to boost employment during an economic downturn."9
