Why does inflation encourage businesses and households to hold physical assets like homes, buildings, and equipment?

ECO100 Economics



Your friend at work says the U.S. economy is not doing well: “We are just not a strong economy anymore.” You are not entirely convinced by her argument, so you do some research. Here is what you find:

There are three major powers in the world economy according to total GDP: China at $21.3 trillion; the EU at $19.2 trillion; and the United States at $18.6 trillion (all in real 2016 dollars). Maybe your friend is right?

Then you look at per capita GDP and it does not seem to tell the same story: China per capita GDP is $15,400; EU per capita GDP is $37,800; and U.S. per capita GDP is $57,300. Maybe your friend is wrong?

Perhaps we really need to understand what GDP measures and what it does not measure.

Using the above facts, make the case that the United States is still economically strong.

What does GDP measure and what does that tell us about our country’s economic strength?

Do you feel that GDP is valuable in understanding our country’s economic strength? Explain why or why not.

Do you believe that there is a better measure of a country’s economic strength that we should also use (in addition to GDP)? Explain your answer. If you don’t think there is, explain why.



In the past, the single largest asset a person or family owned was their home. However, since the Great Recession and the bursting of the housing bubble in 2007, many families consider owning a home a risky investment.

Check out the Bureau of Labor Statistics (BLS) Inflation Calculator

Test out the impact of inflation on an asset like a home.

Click on “Try the Inflation Calculator.”

Enter the year you bought your home. If you have not purchased a home, enter a random year.

Assume that you paid $100,000 for it.

How much has the value of the home changed based on the CPI calculator?

Why does inflation encourage businesses and households to hold physical assets like homes, buildings, and equipment?


“Aggregate Demand and Supply”

In 1973, there was an oil supply shock created by OPEC (the Organization of the Petroleum Exporting Countries). Your textbook describes the supply shock as a source of the recession which lasted from 1973-1975.

Now the price of oil is dropping. Let’s look at what happens when the supply shock is favorable.

Use aggregate demand and aggregate supply to explain why current oil prices are so low. It is certainly good for consumers, but is there a downside as well?

When oil prices drop, who benefits and who loses? Why? How?