Welcome to Section 4-5: Inflation, Taxes, and Stocks! In this lesson, we wrap up Chapter 4 on Personal Finance by looking at the broader economic factors that affect your wallet. We aren't just calculating interest anymore; we are looking at how the value of money changes over time and how to interpret financial data like the Consumer Price Index (CPI) and the Dow Jones Industrial Average (DJIA).

1. Understanding Inflation and the CPI

Inflation is simply an increase in prices, while deflation is a decrease. To measure this, economists use the Consumer Price Index (CPI), which tracks the average price of a standard "market basket" of goods and services.

To calculate the rate of inflation (or the percentage change in CPI), we use the standard percentage change formula:

$$ \text{Percentage Change} = \frac{\text{Current CPI} - \text{Previous CPI}}{ ext{Previous CPI}} \times 100\% $$

2. The Buying Power Formula

When inflation goes up, the purchasing power of your dollar goes down. However, it doesn't drop by the exact same percentage number. In this course, we use a specific formula to calculate exactly how much your buying power decreases based on the inflation rate $i$ (where $i$ is the percent value, e.g., use 5 for 5%):

$$ \text{Percent decrease in buying power} = \frac{100i}{100 + i} $$

Conversely, if you know the buying power decreased by a certain percentage $B$, you can find the inflation rate using this arrangement:

$$ \text{Percent rate of inflation} = \frac{100B}{100 - B} $$

3. Taxes: Credits vs. Deductions

One of the most practical skills in this section is understanding how income tax is calculated. We use marginal tax tables, meaning you pay different rates on different portions of your income.

A key concept from the notes is the difference between a tax deduction and a tax credit:

  • Tax Deduction: Lowers your taxable income. (Example: If you make \$50,000 and have a \$1,000 deduction, you are taxed as if you made \$49,000).
  • Tax Credit: Lowers the tax you owe dollar-for-dollar. (Example: If you owe \$5,000 in taxes and have a \$1,000 credit, you now owe \$4,000).

Tip: As shown in the Betty vs. Carol example in the slides, a tax credit is generally more valuable than a deduction of the same dollar amount!

4. Stock Market Mathematics

Finally, we look at the Dow Jones Industrial Average (DJIA). The "Dow" is not just a simple average of stock prices; it uses a divisor that acts as a multiplier. In our text, for every \$1 move in a Dow company's stock price, the average changes by about 7.56 points.

Example: If a stock increases by \$3 per share, the DJIA increases by:

$$ 3 \times 7.56 = 22.68 \text{ points} $$

Please review the attached PDF notes for the specific tax tables required for the assignment. Good luck with the calculations, and keep "thinking between the lines"!