Inflation

Inflation - A general rising level of prices.

- Reduces the "purchasing power" of money

3 Causes of Inflation

1. Printing too much money; the Quantity theory

2. Demand-Pull Inflation - Excess of demand over output that pulls prices upward

3. Cost-Push Inflation - Higher production costs increases prices

- Standard inflation rate = 2-3%

- Formula = Current year price index - Base year price index / Base year price index X 100

- Rule of 70 - It is used to calculate the number of years it will take for price levels to double at any given rate of inflation

- Formula = 70 / Annual Inflation Rate

Deflation - A general decline in the price level

Disinflation - It occurs when the inflation rate declines

Real Interest Rates - Percentage increase in "purchasing power" that a borrower pays to the lender; adjusted for inflation rate

- Formula = Nominal interest rate - expected interest rate

Nominal Interest Rates - Percentage increase in money that the borrower pays back to the lender; not adjusted for inflation

Unanticipated Inflation

Hurt by Inflation -

- Lenders: People who lend money at fixed interest rates

- People with a fixed income

- Savers

Helped by Inflation -

- Borrowers - People who borrow money

- A business where the price of the product increases faster than the price of resources