unit 2: inflation

Inflation
General rise in the price level
-reduce the purchasing power of money

Amount of goods and services that money buys.


Three causes

1.government Printing too much money.

( hyper inflation- govt that keeps printing money to pay debt)
2.Demand-Pull inflation : too many dollars chasing too few goods

pull up prices
3.Cost-Push inflation: higher production cost increase in prices


Ideal Inflation
Ideal inflation rate is from 2% to 3%.


Inflation Formula
Current Year Price Index - Previous Year Price Index
___________________________________________ * 100
Previous Year Price Index


Deflation
A decline in the general price level.


Real Interest Rate
Amount of money that is borrowed.
Percent increase in purchasing power that a borrower pays to the lender (adjusted for inflation)


=Nominal Interest Rate - Expected inflation


Nominal Interest Rate
The percent increase in money that the borrower pays back to the lender not adjusting for inflation.


unexpected inflation

Hurt by Inflation

• Lenders- People who lend money (at fixed interest rates)
• People with fixed incomes
• Savers

Helped by Inflation

• Borrowers- People who borrow money
• A business where the price of the product increases faster than the price of resources.