Inflation

Inflation: a rise in the general level of prices
-formula: new GDP deflator-old GDP deflator/old GDP deflator x 100

Inflation rate: measures the percentage increase in the price level over time; offers a key indicator of the economy's help

Deflation: decline in the general price level

Disinflation: occurs when the inflation rate declines

Consumer price index (CPI): 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

Find inflation rate using market basket data:
-formula: current year market basket value - base year market basket value/base year market basket value x 100

Find inflation rate using price indexes:
-formula: current year price index-base year price index/base year price index x 100

Estimating inflation using the rule of 70:
formula: years needed to double inflation = 70/annual inflation rate

Rule of 70 is used to calculate the # of years it will take for the price level to double at any given rate of inflation

Determining real wages:
formula: real wages=nominal wages/price level x 100

Finding real interest rate:
formula: nominal interest rate-inflation premium

Standard inflation: 2-3%

Real interest rate: cost of borrowing or lending money that is adjusted for inflation

Nominal interest rate: unadjusted cost of borrowing or pending money


Causes of inflation:
A. Demand pull inflation: it is caused by an excess of demand over output that pull prices upward
B. Cost push inflation: caused by a rise in per unit production cost due to increasing resource cost

Effects of inflation:
-Anticipated inflation
-Unanticipated inflation

What is hurt by inflation?
-Fixed income (social security, scholarship, etc.)
-Savers
-Lenders/creditors

What is helped by inflation?
-Borrowers (debt will be repaid)