D2.Eco.12.6-8: How Inflation, Deflation and Unemployment Affect Different Groups

Overview

Lesson Procedure

60-70 minutes of class time across 5 phases.

1. Warm-Up5-10 minutes
2. Direct Instruction15-20 minutes
3. Guided Practice15 minutes
4. Independent Practice15 minutes
5. Closure10 minutes

1. Warm-Up5-10 minutes

   Warm-Up Prompt

   "Imagine that next year every price in the country doubles: food, games, rent, everything. Who would be upset? Who might not mind? Think about a retired grandparent, a family paying off a car loan, a student with savings, and a worker who gets a raise."

   Give students two minutes to write, then collect ideas in a T-chart labeled "Hurt" and "Helped or not hurt." Students usually put everyone under "Hurt." Push with one question: "If prices double and your pay also doubles, are you worse off?" Tell students that today's indicator, D2.Eco.12.6-8, asks them to explain how changes in prices and jobs affect different groups differently. Keep the T-chart for Closure.

2. Direct Instruction15-20 minutes

   Key terms for D2.Eco.12.6-8 (working definitions)

   Term	What it means	Everyday example
   Inflation	A rise in the general level of prices, so each dollar buys less	A lunch that cost $8 last year costs $9 now, and most other prices rose too
   Deflation	A fall in the general level of prices, so each dollar buys more	A bushel of wheat that sold for $2.50 sells for $1.00 (Source 2)
   Unemployment	Being without a job while able to work and looking for one	A cook whose restaurant closed and who is applying for new jobs
   Buying power (real value)	What an amount of money can actually buy at current prices	$100 buys less after inflation and more after deflation
   Fixed income	Income that stays the same number of dollars when prices change	A pension of $1,500 a month that never changes
   Creditor (lender) and debtor (borrower)	The creditor lends money and is repaid later; the debtor borrows and repays	A bank (creditor) and a family paying off a car loan (debtor)
   Principal and interest	Principal is the amount borrowed; interest is the extra the borrower pays for the use of it	Borrow $1,000 at 5 percent a year: $50 interest in one year

   Part 1: The same dollar, a different value. When prices change, a dollar amount that is fixed in a contract or a check changes in real value. To find the real value, divide by the new price level: after prices rise 10 percent, $100 buys what $100 / 1.10 = $90.91 bought before. Three groups to watch:

   • People who will receive fixed dollars later (lenders, savers, people on fixed pensions) lose buying power when prices rise and gain it when prices fall.
   • People who must pay fixed dollars later (borrowers) gain when prices rise, because they repay with dollars that buy less, and lose when prices fall.
   • Workers are hurt by inflation when their pay rises more slowly than prices, and are not hurt if their pay keeps up.

   Part 2: Unemployment. A worker who loses a job loses income, and the harm spreads: to the family, to nearby businesses that lose customers, and to governments that collect less tax. Job losses are not spread evenly. They depend on the industry, the kind of job, and the cause of the downturn. The table shows real data from 2020.

   Unemployment rates by industry and by sex, 2019 and 2020, in percent (real data: U.S. Bureau of Labor Statistics, Current Population Survey annual averages 2020, Table 26, Unemployed persons by industry, class of worker, and sex). A worker is counted in the industry of his or her last job. Selected rows; the BLS table has more.

   Group of workers	2019 rate (%)	2020 rate (%)
   All workers (total)	3.7	8.1
   Leisure and hospitality (restaurants, hotels, entertainment)	5.2	19.4
   Transportation and warehousing	3.8	10.4
   Retail trade (stores)	4.4	8.9
   Construction	4.5	8.7
   Manufacturing	3.0	6.8
   Education and health services	2.5	5.7
   Government workers	2.3	4.8
   Finance and insurance	2.0	2.9
   Men, all industries	3.7	7.8
   Women, all industries	3.6	8.3

   • Inflation: lenders lose (primary source)

     Source 1, paragraph 5. The Polish clothier sold 100 suits for 100,000 marks and lent the money out. Three years later he had 118,000 marks, which bought one suit. What did a suit cost before and after, and what share of his buying power did he lose?

     Result: Before: 100,000 / 100 = 1,000 marks a suit. After: 118,000 marks a suit, 118 times as much. He lent the buying power of 100 suits and got back the buying power of 1 suit, so he lost 99 of every 100 suits, or 99 percent. The borrower repaid in marks that were worth almost nothing, so the borrower gained.

   • Inflation: fixed incomes lose (invented numbers)

     A retired bus driver receives a pension of $1,200 a month that never changes. Prices rise 8 percent in a year. What does the $1,200 buy now, measured in last year's prices?

     Result: 1,200 / 1.08 = 1,111.11. The pension now buys what $1,111.11 bought a year ago, about 7.4 percent less (1 - 1 / 1.08 = 0.074). A worker whose pay also rose 8 percent would be no worse off.

   • Deflation: borrowers lose (primary source)

     Source 2, paragraph 3. Wheat fell from $2.50 to $1.00 a bushel. Suppose a farmer owes a loan payment of $600 a year (an invented amount). How many bushels must the farmer sell to make the payment at each price?

     Result: 600 / 2.50 = 240 bushels at the old price; 600 / 1.00 = 600 bushels at the new price. The debt did not change, but it now costs 2.5 times as much wheat, so deflation made the debt heavier.

   • Real interest (Fisher's rule)

     Source 2, paragraph 1 gives a rule of thumb: real interest is about the money interest rate minus the rate of inflation. A family borrows at 6 percent. What is the real interest if prices rise 4 percent? If prices fall 2 percent?

     Result: Prices rise 4 percent: 6 - 4 = about 2 percent real interest, good for the borrower. Prices fall 2 percent: 6 - (-2) = about 8 percent real interest, heavy for the borrower and good for the lender.

   • Unemployment hits groups unevenly (real data)

     Use the BLS table. Compare leisure and hospitality with finance and insurance from 2019 to 2020, the year the COVID-19 pandemic closed many restaurants, hotels and theaters.

     Result: Leisure and hospitality: 19.4 - 5.2 = 14.2 percentage points, and 19.4 / 5.2 = about 3.7 times the 2019 rate. Finance and insurance: 2.9 - 2.0 = 0.9 points. Many finance jobs could be done from home; most restaurant and hotel jobs could not.

   Part 3: Different views. Irving Fisher (1867-1947), a Yale economist and the author of Sources 1 and 2, argued that unstable prices are unfair because they move buying power from one group to another without anyone choosing it. Many economists today add a point: when people expect a steady, small rate of inflation, lenders and workers can build it into interest rates and pay raises, so the biggest harm comes from price changes that surprise people. Students can weigh both ideas as they read.

3. Guided Practice15 minutes

   Reading a primary source about inflation. Context note: Irving Fisher wrote The Money Illusion in 1928. After World War I, prices in Germany and Poland rose so fast that their money (the German mark and the Polish mark) became almost worthless by 1923. The Dawes Commission was an international committee that in 1924 planned how Germany could make the war payments required by the peace treaty and steady its money. Words to know: a mortgage is a loan backed by land or a building; nominally means "in name" or "on paper."

   1Think of the disturbance of loan contracts. When, for instance, there is inflation, and the price level rises, the creditors lose and the debtors gain.

   2It might seem at first that this is as broad as it is long since the debtor gains exactly as much as the creditor loses. It might be argued that no harm can be done to society as a whole either by inflation or deflation since the average wealth would not be changed.

   3But one might as well reason that when a bank vault is robbed or when your house is burglarized, society is none the poorer. If you, the victim of the robbery, should be told, “What you have lost the burglar has gained, and therefore society as a whole is just as well off!” that would be cold comfort to you.

   4In somewhat the same sense this burglarizing dollar is defrauding people, even if it does so impersonally. Something is taken away from its rightful owner. The evil is not (primarily at least) general impoverishment; it is social injustice. Unlike burglary or personal fraud, there is no violation of the letter of the law as to debts, but there is a defeat of its spirit and intent.

   5Extreme examples are always the clearest. The story is told of a Polish clothier, deciding to retire from business, who sold his 100 suits of clothes for 100,000 Polish marks and invested the proceeds in a “secure” three-year mortgage at 6 per cent, thus receiving 18,000 Polish marks in interest and the safe return of his 100,000 Polish marks of principal at the end of three years. But this whole 118,000 Polish marks would then buy only one suit of clothes! Nominally he had received 6% interest. Actually he had lost practically all, interest and principal alike.

   [...]

   6One of the German witnesses who appeared before the Dawes’ Commission was a workingman, representing, he said, fifteen million German laborers. When asked what labor most needed, he said, “a more stable currency.” He said the workmen had no way to lay up for a rainy day, to put by money in order to have it ready to pay the doctor and nurse at the coming of a baby into the family, or to provide for old age or funeral expenses. The mark would lose much of its buying power over night. A wife would meet her husband when he got his wages, snatch the money and run to the grocer to spend it before the soaring prices should soar still higher.

   1. The claim. Prompt: in paragraph 1, what does Fisher say happens to the two sides of a loan when prices rise? Have students restate it with the words "lender" and "borrower."
   2. The objection. Prompt: paragraph 2 states an argument Fisher disagrees with. What is it? Teacher note: some people said the gains and losses cancel out, so society is no poorer.
   3. The answer to the objection. Prompt: how does Fisher reply in paragraphs 3 and 4? Ask students to name the comparison he uses and what word he uses in paragraph 4 for the harm.
   4. The example. Work through Example 1 again with the class, pointing to the numbers in paragraph 5.
   5. Another group. Prompt: paragraph 6 is about workers. Ask: what could workers no longer do, and why did the money have to be spent at once? Students answer in pairs and share one answer each.
4. Independent Practice15 minutes

   Deflation and unemployment. Students read Sources 2 and 3 on their own and answer the questions below. Context note for Source 2: during World War I (1914-1918) farm prices rose, and many American farmers borrowed to buy more land. In 1920 and 1921 prices fell sharply. A note is a written promise to repay a loan; buying "on margin" here means buying with a small payment down and the rest borrowed. Context note for Source 3: unemployment insurance (UI) is a program run by each state under federal law.

   1Just as the Money Illusion hides the distinction between money wages and real wages, so it hides a distinction between money interest and real interest. The rate of interest in terms of money and the rate of interest in terms of commodities are not the same unless we have a stable price level. If the price level rises 1 per cent per annum, a 5 per cent rate of interest in terms of money is really a 4 per cent rate in terms of what money buys. If prices are falling 1 per cent, the nominal 5 per cent is really 6 per cent.

   [...]

   2In this same period the farmer suffered and, as we all know, his sufferings are not yet over. Our tricky dollar had turned the tables on him completely. During the period of inflation and rapidly rising price level our farmers, lured by the hope of large profits and urged by patriotic pleas to win the war with wheat, corn, hogs, and beef, increased the acreage and the yield of farm crops far beyond the peace-time normal. Many farmers were induced to buy land at prices proportionate to the temporarily swollen profits. All this overstimulation of production was bad; the overstimulation of speculation in land values was still worse. But these evils could have been met and overcome without disastrous consequences had the inflated prices been left approximately at the mountain high level of 1920.

   3But deflation followed. Farmers who had extended cultivation on the basis of $2.50 wheat now found they were unable to sell even at $1.00 per bushel, although one-half the world was hungry for wheat and perhaps one-tenth of the whole population was suffering from famine. Those farmers who through the urge of patriotism or profits had purchased farm lands at top-notch prices were unable to meet their notes. They lost, not only the land they had recklessly purchased “on margin” but all the payments they had made thereon.

   4But this is only the beginning of the story. Thousands of banks took over scores of thousands of farms, not because they wanted them, but because they were all the banks could get upon the loans advanced to farmers. Hundreds of these banks failed and bank failures, in turn, caused failures of manufacturing or merchandising establishments.

   1Unemployment Insurance is a joint state-federal program that provides cash benefits to eligible workers. Each state administers a separate UI program, but all states follow the same guidelines established by federal law.

   2Unemployment insurance payments (benefits) are intended to provide temporary financial assistance to unemployed workers who are unemployed through no fault of their own. Each state sets its own additional requirements for eligibility, benefit amounts, and length of time benefits can be paid.

   3Generally, benefits are based on a percentage of your earnings over a recent 52-week period, and each state sets a maximum amount. Benefits are subject to federal and most state income taxes and must be reported on your income tax return. You may choose to have the tax withheld from your payment.

   4Each state sets its own guidelines for eligibility for UI benefits, but you usually qualify if you:

   5Are unemployed through no fault of your own. In most states, this means you have to have separated from your last job due to a lack of available work.

   6Meet work and wage requirements. You must meet your state’s requirements for wages earned or time worked during an established period of time referred to as a "base period." (In most states, this is usually the first four out of the last five completed calendar quarters prior to the time that your claim is filed.)

   Questions for Sources 2 and 3:

   1. Source 2, paragraph 2: give two reasons farmers borrowed during the years of rising prices.
   2. Source 2, paragraph 1: by Fisher's rule, what is a 5 percent loan really worth to the lender when prices fall 1 percent? Who does that help, and who does it hurt?
   3. Source 3, paragraph 2: what kind of help does unemployment insurance give, and to whom?
   4. Source 3 and the BLS table: unemployment insurance replaces only part of a paycheck. Which industry in the table would you expect to have the most workers needing it in 2020, and why?

   Teacher note: answers to questions 1 and 2 should quote or point to the paragraph they use. For question 4, accept any answer that reads the 2020 column correctly and links it to the reason in Example 5.

5. Closure10 minutes

   Who wins and who loses in Alderton? Students read Source 4, an invented scenario. They will use it for the exit ticket and for quiz questions 13-17 and 19, so they should keep it in front of them.

   1Invented scenario, written for this page. Alderton is a fictional town of 20,000 people. This passage follows five residents through two invented years. In Year 1, the prices of the things Alderton families buy rise 10 percent. In Year 2, those prices fall 5 percent, and the town's furniture factory closes.

   2Ruth, 70, is retired. Her pension pays a fixed $1,500 a month. The amount stays the same when prices change.

   3Carlos runs a food truck. He owes the bank $20,000 on a loan he used to buy the truck. The loan has a fixed interest rate, so his payment stays $400 a month in both years.

   4Ana, 16, has $3,000 in a savings account that pays 1 percent interest a year. She is saving for college.

   5Dmitri works at the furniture factory and earns $3,200 a month. At the start of Year 1 he gets a 4 percent raise.

   6Jada is a nurse at Alderton Hospital. A contract raises her pay 3 percent at the start of every year.

   7When the factory closes in Year 2, Dmitri and 300 other workers lose their jobs through no fault of their own. Dmitri qualifies for unemployment insurance of $1,400 a month while he looks for work. The diner and the hardware store next to the factory lose many of their lunchtime and after-work customers.

   Exit ticket (index card): "Pick one Alderton resident. Say whether Year 1 (inflation) helps or hurts that person, whether Year 2 (deflation and the factory closing) helps or hurts, and give the reason for each." Return to the Warm-Up T-chart and move names that belong under "Helped or not hurt."

   Teacher note. Sources 1 and 2 were written in 1928 and use words of their time, such as "workingman" and "laborers." Fisher's examples are real events he reported; his judgment that unstable money is "social injustice" is his interpretation, and students may disagree with it. The page does not take a position on any current policy. The BLS figures are annual averages and may differ slightly from monthly numbers students find.

Differentiation Strategies

Assessment Guidance

1. Question 1 of 20 · Multiple Choice

   Use Source 1, paragraph 1. Mr. Diaz lends his neighbor $2,000, to be repaid in two years with no change for prices. Over the two years, prices rise much faster than either of them expected. By Fisher's claim, who comes out behind?

   AThe neighbor, because a borrower always pays more back than he got BMr. Diaz, because he is repaid in dollars that buy less CNeither of them, because the dollar amount stays the same DBoth, because inflation lowers what everyone's money buys

2. Question 2 of 20 · Multiple Choice

   In Source 1, paragraphs 2-4, why does Fisher compare inflation with a burglary?

   ATo show that inflation is a crime that lenders can take to court BTo show that burglaries become more common when prices rise CTo show that one person's gain does not make up for another's loss DTo show that society as a whole becomes much poorer whenever prices rise

3. Question 3 of 20 · Multiple Choice

   In Source 1, paragraph 6, why did a German wife "snatch the money and run to the grocer"?

   AGrocers would only sell food to people who paid early in the day BHer husband was spending his wages on other things CThe government told families to spend money at once DPrices rose so fast that the wages lost value within a day

4. Question 4 of 20 · Multiple Choice

   A retired worker's pension is $2,400 a month and does not change. Prices rise 4 percent this year. What does the pension buy now, measured in last year's prices?

   A$2,307.69 B$2,496.00 C$2,304.00 D$2,400.00

5. Question 5 of 20 · Multiple Choice

   A family borrows at 4 percent interest a year. During the year, prices fall 2 percent. Using Fisher's rule of thumb in Source 2, paragraph 1, about what is the real interest rate?

   AAbout 2 percent BAbout 4 percent CAbout 6 percent DAbout 8 percent

6. Question 6 of 20 · Multiple Choice

   Use Source 2, paragraph 3. Why were many farmers "unable to meet their notes"?

   AThey had stopped growing wheat when the war ended BCrop prices fell while the amounts they owed stayed the same CBanks raised the amount owed on every farm loan DThe rest of the world no longer wanted to buy American wheat at any price

7. Question 7 of 20 · Multiple Choice

   In Source 2, paragraph 4, which group was hurt by deflation even though it was the lender?

   ABanks, which took over farms and in many cases failed BWorkers in other countries suffering from famine CFarmers who had bought land on margin and lost all their payments DBuyers of wheat in the cities

8. Question 8 of 20 · Multiple Choice

   Use the BLS table. By how many percentage points did the unemployment rate in retail trade rise from 2019 to 2020?

   AAbout 2.0 points B13.3 points C8.9 points D4.5 points

9. Question 9 of 20 · Multiple Choice

   Use the BLS table. In transportation and warehousing, about how many times larger was the 2020 unemployment rate than the 2019 rate?

   AAbout 3.7 times BAbout 2.7 times CAbout 6.6 times DAbout 0.4 times

10. Question 10 of 20 · Multiple Choice

    According to Source 3, paragraph 2, unemployment insurance is meant to help which workers?

    AWorkers who are unemployed through no fault of their own BAny worker whose pay has not kept up with the rising prices of goods CWorkers who choose to retire early DBusiness owners whose sales have fallen

11. Question 11 of 20 · Multiple Choice

    According to Source 3, paragraph 3, how is the amount of a weekly benefit usually set?

    AEvery state pays the same fixed amount to every worker who applies BIt equals the worker's full weekly pay CIt is a percentage of recent earnings, up to a state maximum DIt depends on how many children the worker has

12. Question 12 of 20 · Multiple Choice

    Prices across the economy fall 3 percent in a year, and jobs stay steady. Which of these is most likely helped?

    AA store owner who must keep making fixed payments on a large bank loan BA city government that must repay a fixed amount it borrowed by selling bonds CA dairy owner whose milk prices fall while the payments on the barn loan stay the same DA student who will receive a scholarship payment of exactly $3,000 next year

13. Question 13 of 20 · Multiple Choice

    Use Source 4. In Year 1, whose buying power falls by the largest percent?

    ARuth BJada CDmitri DAna

14. Question 14 of 20 · Multiple Choice

    Use Source 4. Who is helped by the inflation in Year 1?

    AAna, because her savings account pays her interest every year BJada, because her pay goes up every year CCarlos, because his fixed payment buys less than before DRuth, because her pension never goes down

15. Question 15 of 20 · Multiple Choice

    Use Source 4. In Year 2, prices fall 5 percent. Ruth's $1,500 in Year 2 buys what amount bought in Year 1?

    A$1,425.00 B$1,578.95 C$1,575.00 D$1,500.00

16. Question 16 of 20 · Multiple Choice

    Use Source 4. In Year 2, Dmitri receives $1,400 a month in unemployment insurance. About what percent of his pay just before the factory closed does it replace?

    AAbout 44 percent BAbout 58 percent CAbout 238 percent DAbout 42 percent

17. Question 17 of 20 · Short Answer

    Use Source 4, paragraph 7. Explain how the factory closing affects at least two groups of people who never worked at the factory.

    Show model answer

18. Question 18 of 20 · Short Answer

    In Source 1, paragraph 4, Fisher says the harm of inflation "is not (primarily at least) general impoverishment; it is social injustice." Explain what he means, using the Polish clothier in paragraph 5 as your example.

    Show model answer

19. Question 19 of 20 · Short Answer

    Use Source 4. Compare how Year 1 and Year 2 affect Carlos. Show the real value of his $400 payment in each year, in the prices of the year before.

    Show model answer

20. Question 20 of 20 · Short Answer

    Use the BLS table and Source 3. Explain why unemployment in 2020 did not affect all workers equally, and explain what unemployment insurance can and cannot do for a worker who loses a job.

    Show model answer

These standards connect to D2.Eco.12.6-8: prerequisites to review first, parallel standards at the same level, and next steps that build on it.

Standard text: National Council for the Social Studies (NCSS), The College, Career, and Civic Life (C3) Framework for Social Studies State Standards: Guidance for Enhancing the Rigor of K-12 Civics, Economics, Geography, and History (Silver Spring, MD: NCSS, 2013). NCSS was not involved in the production of this lesson and does not endorse it.