Inflation- February 06, 2017

Inflation

• Inflation:
  -Increase or rise in price or general rising level of prices
  -Reduces the 'purchasing power' of money
• Purchasing power:-Amount of goods and services that your money can buy

• Three Cause of Inflation1) Printing too much money
  2) Demand- Pull inflation   
      -caused by an excess of Demand over output that pulls prices upward
  3) Cost- Pull inflation    
      -caused by a rise in per unit production costs due to increasing resource cost
• Inflation rate:
  -Ideal inflation rate is 2- 3%
  -(Current Price index - Base year price index)  * 100
                    Base year price index
• Rule of 70
  -Used to calculate the # of years it will take for the price level to double at any given rate of inflation
  -(70/annual rate of inflation)
• Deflation:
  -General decline in the price level
• Disinflation:
  -Occurs when the inflation rate itself declines
• Nominal Interest rate
  -Unadjusted cost of borrowing or lending money
• Real interest rate:
  -Cost of borrowing or lending money adjusted for inflation
  -Real = nominal interest rate - expected inflation
• Unanticipated inflation (Hurt by inflation):
  -Lenders - people who lend money at fixed interest rates
  -People with fixed incomes
  -Savers
• Anticipated inflation (Helped by inflation):
  -Borrowers- people who borrow money
  -A business where the price of the product increases faster than the price of resources
• Cost of Living Adjustment (COLA):
  -Some workers have salaries that mirror inflation
  -They negotiate wages that rise with inflation