2/6/17: Inflation

• Inflation
• General rise of level of prices
• It reduces the "purchasing power" of money
• ex) It takes $2 to buy today what $1 bought in 1982.

• Three Causes of Inflation 
1. Printing too much money (The Quantity Theory)
2. Demand-Pull Inflation
• Caused by excess of demand over output, that pulls prices upward.
• "too many dollars chasing too few goods"
3. Cost-Push Inflation
• Higher production cost increases prices.
• Standard Inflation Rate
• 2 to 3 %
• Formula for Inflation Rate
• (Current year price index - Base year price index) / Base year price index x 100
• Rule of 70
• Used to calculate the # of years it will take for the price level to double at any given rate of inflation.
• 70 / Annual Inflation Rate
• Deflation
• General decline in the price level.
• Disinflation
• Occurs when the inflation rate declines.

• Real Interest Rate
• The percentage increase in purchasing power that a borrower pays to the lender (adjusted for inflation)
• Real = 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 rate)
• People with 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.