- reduces the "purchasing power" of money
- Example:
- It takes $2 to buy today what $1 bought in 1982
- It takes $6 to buy today what $1 bought in 1961
Three Causes of Inflation
- Printing too much money (The Quantity Theory)
- Demand-Pull Inflation
- "Too many dollars chasing too few goods" - caused by an excess of demand over output that pulls prices upwards
- Cost-push inflation
- Higher Production costs increase prices
Standards Inflation Rate: 2-3%
Inflation Rate=(Current Year Price Index - Base year Price Index/ Base Year Price Index) x 100
Rule of 70: used to calculate the number of years it will take for the price level to double at any given rate of inflation
Rule of 70= (70/ annual inflation rate)
Deflation: 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)
Real= nominal interest rate - expected inflation
Nominal Interest Rates: the percentage increase in money that the borrower pays back to the lender not adjusting for inflation
Ex: You lend out $100 with 20% interest
Unanticipated 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 products incrassees faster than the price of resources.
Your notes are very concise and clear! I noticed some spelling errors, such as when you stated "incrassees" instead of increases. Also, a video giving an in-depth explanation of how to calculate the inflation rate would have helped me to better understand the topic. Great job.
ReplyDeleteI am truly impressed with the level of organization that you blog inhibits. Your notes are very concise and easy to follow. Also, the picture adds a nice visual aspect for the concept of inflation. Keep up the good work , Sufyan!
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