Module 39

Inflation & Monetary Policy

This high school economics module explains why prices rise, how inflation changes purchasing power, and why unexpected inflation creates winners and losers across an economy.

Students distinguish inflation, disinflation, deflation, and hyperinflation, then examine how the Federal Reserve uses monetary policy, the federal funds rate, and IORB to pursue stable prices and maximum employment.

Module At A Glance

Grade Levels:

9th - 12th

Est. Length:

1-2 Weeks (39 slides)

Activities:

8 Activities

Articles:

0 Articles

Languages:

English & Spanish

Curriculum Fit:

Math, Business, Economics, CTE, Social Studies

Standards Alignment:

CEE National Standards

Guiding Questions

Why do prices rise, who does inflation hurt, and how can it help fixed-rate borrowers?
How are inflation, disinflation, deflation, and hyperinflation different?
How does inflation affect purchasing power when income grows faster or slower than prices?
What is the difference between demand-pull inflation and cost-push inflation?
How can inflation expectations become self-fulfilling?
How is the Federal Reserve System structured, and which part sets monetary policy?
What does the Fed's dual mandate require it to balance?
How do federal funds rate changes ripple into borrowing, spending, employment, and prices?

Enduring Understandings

Inflation is a sustained rise in the overall price level that erodes purchasing power when income does not keep pace.
Inflation can begin from stronger demand, higher production costs, or expectations that cause households and firms to act before prices rise further.
Unexpected inflation redistributes wealth by hurting savers, lenders, and fixed-income households while helping fixed-rate borrowers repay with cheaper dollars.
Extreme inflation can destroy confidence in money itself, pushing people toward barter or foreign currencies.
The Federal Reserve pursues price stability and maximum employment through the Board of Governors, 12 Reserve Banks, and the FOMC.
The FOMC steers the federal funds rate, using tools like IORB to influence borrowing costs, spending, jobs, and inflation.

Module Vocab & Key Topics

Inflation: A sustained rise in the overall price level, meaning goods and services generally cost more over time.
Disinflation: A slowdown in the inflation rate, where prices are still rising but at a slower pace than before.
Deflation: A sustained fall in the overall price level, meaning goods and services generally cost less than before.
Hyperinflation: An extremely rapid rise in prices that can cause people to abandon a currency because it loses value too quickly.
Purchasing Power: The amount of goods and services money can buy; it falls when prices rise faster than income.
Demand-Pull Inflation: Inflation caused when overall spending rises faster than the economy's ability to produce goods and services.
Cost-Push Inflation: Inflation caused when production costs, such as wages, raw materials, or energy, rise and firms pass those costs into prices.
Inflation Expectations: Beliefs about future inflation that can influence current buying, wage, and pricing decisions.
Fixed Income: Income that does not automatically rise with prices, causing purchasing power to fall when inflation increases.
Fixed-Rate Borrower: A borrower whose required repayment does not change when inflation rises, making future payments cheaper in real terms if inflation is higher than expected.
Federal Reserve: The central bank of the United States, responsible for monetary policy, financial-system stability, bank supervision, and payment services.
Board of Governors: The seven-member leadership body in Washington, D.C. that oversees the Federal Reserve System.
Federal Reserve Banks: The 12 regional Reserve Banks that supervise financial institutions, support payments, and help carry out Federal Reserve policy across the country.
Federal Open Market Committee (FOMC): The Federal Reserve committee that sets U.S. monetary policy, including the target range for the federal funds rate.
Dual Mandate: The Federal Reserve's responsibility to pursue stable prices and maximum employment.
Price Stability: A condition where inflation is low and predictable enough for households and businesses to plan.
Maximum Employment: The strongest level of employment the economy can sustain without creating rising inflation pressure.
Federal Funds Rate: The overnight interest rate banks charge each other to borrow reserves, which influences borrowing costs throughout the economy.
Interest on Reserve Balances (IORB): The interest rate the Fed pays banks on reserve balances, used as a primary tool to help steer the federal funds rate into the FOMC's target range.
Monetary Policy: Central bank actions that influence interest rates, money, credit, spending, employment, and inflation.

Worked Examples

Inflation In Action

Four ways rising prices reshape the value of money.

Figures current · August 2026

CPI

Measuring the Price Level

inflation = %Δ CPIyear over year

Inflation is not the price level itself — it is how fast that level changes. The Bureau of Labor Statistics prices a fixed basket of goods in the Consumer Price Index; the all-items index rose 3.4% over the 12 months ending July 2026, down from above 6% in 2021 and 2022.

3.4%12 months ending July 2026down from 7.0% in 2021

Inflation measures the percentage change in a basket's price from year to year, so a falling inflation rate still means prices are rising, just more slowly.

Rule of 70

When Do Prices Double?

years ≈ 70 ÷ inflationthe Rule of 70

How long before a steady inflation rate doubles the price of everything? Divide 70 by the rate — the Rule of 70, inflation's cousin of the Rule of 72 used for returns. At the Fed's 2% goal prices double in about 35 years; at 5% in 14 years; at 7% in just 10.

35 yrsfor prices to double at 2%70 ÷ 2

Even a low, steady inflation rate doubles the price level within a working lifetime, because a constant percentage compounds on the new, higher prices each year.

Real wages

A Raise That Isn't

real wage = nominal ÷ price leveldeflated by CPI

A bigger paycheck is only a raise if it outruns prices. Over the year to July 2026 average hourly earnings rose 3.2%, from $36.47 to $37.62 — but the Consumer Price Index rose faster, so real average hourly earnings, in constant 1982-84 dollars, slipped 0.2% to $11.30. The dollars grew; what they buy did not.

+3.2%nominal pay, year to July 2026real pay: −0.2%

When a raise is smaller than inflation, the extra dollars buy less than before — nominal pay rises while real pay, the paycheck divided by the price level, falls.

Purchasing power

What a Dollar Buys Later

purchasing power = 1 ÷ (1 + i)ⁿi = 2%, n = 30

The Fed aims for 2% inflation a year — low, but it never stops. Dividing a fixed sum by 1 plus that rate raised to each year shows its shrinking real value. Set aside $1 for a 30-year retirement horizon and, at a steady 2%, it buys about 55 cents of today's goods by the end — you'd need $1.81 to keep even.

$0.55what $1 buys after 30 yearsat the Fed's 2% goal

A steady inflation rate compounds against a fixed sum, so its buying power decays along a curve rather than a straight line, losing the most in absolute terms early on.

Sources: U.S. inflation 3.4% for the 12 months ending July 2026 (BLS Consumer Price Index, all items, released 2026-08-12); average hourly earnings $37.62 vs $36.47 a year earlier and real average hourly earnings $11.30 in constant 1982-84 dollars, down 0.2% over the year (BLS Real Earnings, July 2026, Table A-1, released 2026-08-12); the Federal Reserve's 2% longer-run inflation goal (FOMC Statement on Longer-Run Goals). Empirical figures checked 2026-08-24. The Rule of 70 doubling times, the wage index (2021 = 100), and the purchasing-power curve are derived from the inputs shown.

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Money, Banking & Interest Rates

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Fiscal Policy & Taxation