Inflation Worksheet

Ask a class of high schoolers what causes inflation and you'll get "prices go up" as the whole answer. This worksheet pushes past that one-liner. It walks students through five real economic scenarios — a government stimulus package, a central bank raising interest rates, an oil price shock, widespread wage increases, and a sharp corporate tax cut — and asks them to trace each one through to its effect on consumer spending, inflation, and GDP.

Each scenario is short: two or three multiple-choice questions built around a single event, so students have to reason through cause and effect rather than memorize a definition. The stimulus and interest rate scenarios cover fiscal and monetary policy, the two levers governments and central banks actually pull. The oil shock scenario introduces supply-side inflation, a different mechanism than the demand-side story students usually hear first. The wage and tax scenarios round it out with labor market and business investment angles.

Plan for 20 to 30 minutes if you want to work through all five scenarios with time for discussion. The multiple-choice format keeps the activity moving fast, which makes it useful as a warm-up before a lecture on monetary policy or as a review before a test, not just as an anchor activity.

Because every scenario asks the same three questions — effect on spending or costs, effect on inflation, effect on GDP — students start to notice the pattern themselves by the third or fourth scenario. That's the real payoff: they stop treating inflation as one mysterious force and start seeing it as the output of a handful of specific pushes and pulls, some coming from the government, some from the market itself.

This activity is from Module 25 of the Rapunzl curriculum, The Economy & Federal Reserve.

What Causes Inflation?

In this activity, students will analyze different scenarios involving public, private, and government sectors, and determine the impact on GDP and inflation. This exercise will help students understand the various factors contributing to inflation and economic growth.

Scenario 1: Government Stimulus Package

The government introduces a large stimulus package to boost the economy, including direct payments to citizens, increased unemployment benefits, and infrastructure spending.

1. What immediate effect might this stimulus package have on consumer spending?
   • a. Decrease consumer spending
   • b. Increase consumer spending
   • c. No change in consumer spending
2. How could this government spending impact inflation?
   • a. Decrease inflation
   • b. Increase inflation
   • c. No impact on inflation
3. What is the likely impact on GDP in the short term?
   • a. Decrease in GDP
   • b. Increase in GDP
   • c. No change in GDP

Scenario 2: Central Bank Increases Interest Rates

The central bank raises interest rates to combat rising inflation.

1. How does an increase in interest rates typically affect borrowing and spending?
   • a. Encourages borrowing and spending
   • b. Discourages borrowing and spending
   • c. Has no effect on borrowing and spending
2. What is the likely impact on inflation due to the increase in interest rates?
   • a. Inflation decreases
   • b. Inflation increases
   • c. Inflation remains unchanged
3. What could be the potential effect on GDP?
   • a. GDP increases
   • b. GDP decreases
   • c. No effect on GDP

Scenario 3: Oil Price Shock

A significant disruption in oil supply leads to a sharp increase in oil prices.

1. What is the immediate effect of higher oil prices on production costs for businesses?
   • a. Production costs decrease
   • b. Production costs increase
   • c. Production costs remain unchanged
2. How might this oil price increase affect the overall price level (inflation)?
   • a. Inflation decreases
   • b. Inflation increases
   • c. Inflation remains unchanged
3. What is the potential impact on GDP growth?
   • a. GDP growth increases
   • b. GDP growth decreases
   • c. No effect on GDP growth

Scenario 4: Wide Spread Wage Increases

Wages across various sectors increase significantly due to strong labor demand and more companies are hiring workers.

1. How does a broad increase in wages affect consumer spending?
   • a. Decrease consumer spending
   • b. Increase consumer spending
   • c. No change in consumer spending
2. What is the likely effect on inflation from widespread wage increases?
   • a. Decrease inflation
   • b. Increase inflation
   • c. No impact on inflation

Scenario 5: Decrease in Corporate Taxes

The US government passes legislation which reduces the corporate tax rate from the current 21% tax rate, to 5%.

1. How might lower corporate taxes affect business investment?
   • a. a) Decrease business investment
   • b. b) Increase business investment
   • c. c) No change in business investment
2. What is the expected impact on (inflation in the short term?
   • a. Inflation decreases
   • b. Inflation increases
   • c. Inflation remains unchanged
3. What could be the potential effect on GDP?
   • a. GDP increases
   • b. GDP decreases
   • c. No effect on GDP

Teacher Notes

As students move through the five scenarios, watch for whether they treat "more spending" and "more inflation" as automatically linked, or whether they can explain the mechanism in between — more money chasing the same goods and services. The oil shock scenario is the one most likely to trip students up, because it moves through production costs first, not consumer demand, so a student who nails the stimulus questions may still stall here.

The corporate tax scenario is worth slowing down on. Students often default to "taxes go down, businesses have more money, they invest more," which is a reasonable first step, but push them to say what that investment does to output and prices before they lock in an answer on inflation and GDP.

A good full-class discussion prompt: which of the five scenarios comes from a deliberate policy choice, and which is closer to something that just happens to the economy? That distinction sets up later material on the difference between fiscal policy, monetary policy, and outside shocks.

The answer key for this activity, along with the other activities in this module, is in the Rapunzl teacher portal.

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