February 6, 2017

Inflation

Inflation: A general rising in the level of prices

• Reduces the "purchasing power" of money

Causes of Inflation:

1. Printing too much money (The Quantity Theory)
2. Demand-Pull Inflation ("Too many dollars chasing too few goods")
• Caused by excess of demand over output that pulls prices outward
3. Cost-Push Inflation (Higher production costs increase prices)

• Gas prices go up during Hurricane Katrina

Standard Inflation Rate: 2-3%

Inflation Rate Formula:

Current Year Price Index * Base Year Price Index / Base Year Price Index * 100

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

70 / Annual Inflation Rate

Deflation: A general decline in the price level

Disinflation: Occurs when the inflation rate declines 

Real Interest Rates: The percentage increase in purchasing power that a borrower pays to the lender (Adjusted for inflation)

• Nominal Interest Rate- Expected Inflation 

Nominal Interest Rate: The percentage increase in money that the borrower pays back to the lender (NOT adjusting for inflation)

Unanticipated Inflation:

• Hurt by Inflation
• Lenders: People who lend money (at fixed interest rates)

• People with fixed income (Social Security ----> Senior Citizens)

• Savers

• Helped by Inflation

• Borrowers: People who borrow money

• A business where the price of the producer increases faster than the price of resources