Inflations

 Inflation

 A rise in the general level of prices Standard Inflation Rate : 2-3%
 Measuring Inflation

• A. Inflation Rate - Measures percentage increase in price level over time
• ~ Key indicator of economy's strength

Deflation - Decline in general price level
Disinflation - Occurs when inflation rate itself declined
Consumer Price Index (CPI) - Measures inflation by tracking the yearly price of a fixed basket of consumer goods and services
Indicates changes in the price level and cost of living
 Solving Inflation Problems

• Finding inflation rate using market basket data -

((current year market basket value - base year market basket value) / base year market basket value) x 100

• Finding inflation rate using index prices-

((current year price index - base year price index) / base year price index) x 100

• Estimating inflation rate using the rule of 70-

 Rule of 70: Used to calculate the number of years it will take for the price level to double at any given rate of inflation
Years needed to double inflation = 70 / annual inflation rate
Determining real wages
(Nominal wages / price level) x 100
Finding real interest rate
 Real interest rate = nominal interest rate - inflation premium

• Cost of borrowing or lending money that is adjusted for expected inflation (always expressed as percentage)

Nominal Interest Rate = 

• did not adjust the cost of borrowing or lending money

Causes of Inflation

•  Demand-Pull Inflation - Caused by an excess of demand over output that pulls prices upward
• Cost-Push Inflation - Caused by a rise in per unit production cost due to increasing resource cost

 Effects of Inflation

• Anticipated - Ex. In a year, we're gonna lay off people. You see it coming.

• Unanticipated - Ex. Just fired abruptly. It hits you like a freight train.

Hurt by Inflation

•  People on Fixed Income - Social security, etc.
• Savers - People who save money
•  Lenders/Creditors

Helped by Inflation

•  Borrowers, because their debt would be repaid with cheaper dollars than those that were loaned out

• Fixed Contracts - Rate cannot change