Inflation

Inflation- a rise in general price level of prices

Measuring inflation 2%-3%
a. Inflation rate- measures the percentage increase in the key indicator of economy health

1. Deflation- decline in general price level
2. Disinflation

b. Consumer Price Index- measures inflation by tracking a yearly price of fixed basket of goods and services

- indicates change in the cost of living and price level

Solving Inflation Problems 

a. finding inflation rate using market basket data

current year market basket value - base year market basket value

__________________________________________x 100

Base year market basket value                                   

b. Find inflation rate using price indexes

current year price index- base year price index

____________________________________x 100

Base year price index

c. estimating inflation using the rule of 70

-used to calculate the number of years it will take for the price level to double at any given rate

Years needed to double inflation= 70

_________________________

annual inflation rate

d. Determining Real Wages

real wages is equal to nominal wages

-----------------------------------------x 100

over the price level 

e. Finding Real Interest Rate

Real Interest rate= nominal rate - premium

1. Real Interest Rate- the cost of borrowing or lending money adjusted to
2. Nominal Interest rate- the unadjusting cost of borrowing or lending money 

IV causes of inflation

a. demand-pull inflation- it is caused by an excess of demand over out put that pulls prices upward

b.  Cost-Push inflation- it is caused by a rise in per unit production cost due to increasing research cost

V Effects of Inflation

anticipated- you know it was going to hurt

Unanticipated- you have no idea of the sudden changes

Hurt by Inflation

• Fixed income leaders/ creditors
• savers

Help by Inflation

• borrowers

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