Eco Notes 3 Unit 2 2/2/15
Inflation- a rise
in the general level of prices
Measuring inflation
2% to 3% standard
Inflation
rate- key indicator in economy’s health, measure the percentage increase in
price over time
Deflation-
decline in general price level
Disinflation-
occurs when inflation rate declines
(CPI)
Consumer Price Index- measures inflation by tracking the yearly price of a
fixed basket of consumer goods and services, indicates changes in the price
level and cost of living
Solving inflation
problems
Finding
inflation using market basket data- (current year market basket value – base
year market basket value)/ base year market basket value * 100
Finding
inflation rate using price indexes- (current year price index – base year price
index) / base year price index * 100
Estimating
inflation using the rule of 70
Rule
of 70- used to calculate the number of years for the price level to double at
any given rate of inflation formula: 70/ annual inflation rate = years needed
to double inflation
Determining
real wages = nominal wages / price level * 100
Finding
real interest rate= nominal interest rate- inflation premium
Real
interest rate- cost of borrowing or lending money that is adjusted for
inflation always expressed as a percentage
Nominal
interest rate- unadjusted cost of borrowing or lending money
Causes of Inflation
Demand-pull inflation-
caused by excess of demand over output that pulls prices upward
Cost-push
inflation- caused by a rise in per unit production cost due to increasing
resource cost
Effects of inflation
Anticipated – talking about
it in the news already known
Unanticipated-
did not know it was coming happened suddenly
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Helped by inflation
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Hurt by inflation
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Borrowers- debt will be repaid with cheaper dollars than those that
were loaned out
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Fixed Income
Savers
Lenders/ Creditors- money worth less when get it back
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