Unit 2 - Inflation

February 2, 2015

Inflation: A rise in general level of prices. The inflation Standard 2% - 3%

Inflation Rate: Mesures percent increase. Key indicator of Economies Strength.

Deflation: Decline in general price level

Disinflation: Occurs when inflation rate declines

CPI: "Consumer Price Index" mesures inflation by tracking the yearly price of consumer goods and services. Indicates changes in price levels and price of living.

Formulas:

• Finding Inflation Rate Using market base data.                                                                                   Current  Year Market Basket value - Base Year Market value   X 100                                         Base Year Market value
• Finding Inflation  rate using price index                                                                                         Current year price index - Base year price index    X 100                                                                    Base year price index
• Estimating Inflation Using Rule of 70. Used to calculate the number of years it would take for the price level to double at any given rate of inflation.                                                                            Years Needed to double inflation = 70 / Annual inflation rate
• Determining real wages                                                                                                                        Real Wages = Nominal wages / Price level   X 100
• Finding real Interest rate                                                                                                                 Real interest rate = Nominal interest rate - inflation premium 
• Cost of borrowing/lending money that's adjusted for expected inflation; expressed as percentage.
• Cause of inflation: 
• "Demand-pull inflation" Cost by excess of demand over output that pulls prices upward.
• "Cost-push inflation" Cause by a rise in per unit production rise due to increase resource cost
• Effect of inflation: Hurt people with fixed income, savers, lenders/creditors. Helps borrowers "return with dollars with less power), fixed contracts.
• Anticipated: People are told that they will get laid off ( Get a new job or spend less money)
• Unanticipated: People told its their last day in the job.