Inflation (2/6)

Inflation (2/6)

inflation - general rise in price levels

purchasing power - amount of goods/services are worth

deflation - general decline in the price lvl

disinflation - occurs when inflation rate declines

nominal interest rate - percentage increase in money that borrower pays back to lender ( not adjusted for inflation)  (Nominal IR = Real IR + expected inflation)

real interest rate - percentage increase in purchasing pwr that borrower pays to lender (adjusted for inflation) (Real IR = Nominal IR - expected inflation)

Rule of 70 - used to calc the # of yrs it'll take for the price lvl to be doubled at any given rate of inflation (Calc. by 70 / Annual Inflation Rate)

(Annual) Inflation Rate =

(( Current Yr Price Index - Last/Base Yr Price Index) / Last/Base Yr Price Index )* 100

standard inflation rate - 2% to 3%

3 Causes of inflation

• Printing too much money (Quantity Theory)
• Demand Pull - too man $ chasing too few goods, excess of demands over output pulls prices upward
• Cost Push - higher production cost increase prices

Unanticipated Inflation

• Those Hurt By It - lenders (at a fixed rate), Ppl with fixed income, Savers
• Those Helped By It - borrowers, businesses where price of product increases faster than price of resource