Unit 2: Inflation


Inflation: reduces the purchasing power of money

  • Gas 1982: $0.60, Gas 2018: $2.75
  • when inflation occurs, each dollar of income will buy fewer goods than before
3 Causes of Inflation: 
  • the government prints too much money; governments that keep printing money to pay debts end up with a condition called hyperinflation
  • Demand-pull inflation: too many dollars chasing too few goods; demand pulls up prices
  • Cost-push inflation: higher production cost increases prices
  • Unanticipated inflation: 

Hurt by Inflation: 
  • Lendors/Predators - locked into a fixed interest rate
  • People on a fixed income 
  • Savers
COLA = Cost of Living Adjustment 

Helped by Inflation: 
  • Debtors/Borrowers
  • Flexible Income
  • A business where the price of the product increases faster than the price of resources 
Nominal Interest Rate: the unadjusted cost of borrowing or lending money

Real Interest Rate: the cost of borrowing or lending money that is adjusted for inflation
  • Nominal Interest Rate - Inflation = RIR

Comments

  1. UnknownMarch 1, 2018 at 7:01 PM

    Include a definition of inflation ( a rise in the general level of prices where they increase little by little). You did not define unanticipated inflation as a type of inflation ( causes real income and wealth to be distributed which causes harm to some, but benefits others.) List COLA under helped by inflation instead of hurt by inflation.

    ReplyDelete

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