Unit Two: Inflation

February 2, 2015

Inflation: Rise in general level of prices.
Standard is 2-3 years

Inflation rate: Measures the percentage increase in the price level over time. it is a key indicator of the economy's health.

Deflation: Decline in general price level.

Dis-inflation: Occurs when inflation tare itself declines.

Consumer price index (CPI): measures inflation by tracking the yearly price of a fixed basket of consumer goods and services. In addition CPI indicates changes in the cost of living and price level.

5 Ways to solve inflation...

1. Finding inflation rate using market basket data

Current year market basket value

-

Base year market basket value

*Divided by

Base year market value 

*multiplied by

100

2. Find inflation rate using price index

current year price index

-

base year price index

*divided by 

base year price index

*multiplied by 100

3. Estimating inflation using 70: Rule 70 is used to calculate the number of years it will take the price level to double at any given rate of inflation.

Years needed to double inflation ... 

70

*divided by

Annual inflation rate

4. Determining real wages

Nominal wages

*divided by

Price level 

*multiplied by 100

5. Finding real interest rate

nominal interest 

-

inflation premium

Causes of inflation

1. Demand pull inflation- caused by an excess of demand over output that pulls prices upwards. 

2. Cost push inflation- caused by a rise in per unit production cost due to increasing resource casue. 

Effects of inflation

-Anticipated: already saw it coming.

-Unanticipated: Not Expecting

INFLATION

Helped by it...

-Borrowers - will be repaying with cheaper dollars than those that were loaned out.

-Fixed contract

Hurt by it...

-Fixed income

-Savors

-Lenders and Creditors