Inflation Notes:
What is inflation?
- Inflation is a general racing level of prices.
- It reduces the purchasing power of money.
- Ex: it takes two dollars to buy today what one dollar bought in 1982.
What are three causes of inflation?
- Government prints too much money! ( quantity theory )
- Demand-pull inflation ( too many dollars chasing too few goods ) & ( caused by excess demand )
- Cost-push inflation ( higher production cost increase prices )
What is the standard inflation rate?
- 2% - 3%
What is the formula to find inflation rate?
- Current year price index minus base year price index / base year price index x 100
- New - old / old x 100
What is the rule of 70?
- The rule of 70 is used to calculate the number of years it will take for the price level to double at any given rate of inflation.
- The formula to find the rule of 70:
- 70 / annual inflation rate
What is deflation?
- It is the general decline in the price level
What is disinflation?
- It occurs when inflation rate declines.
What is real interest rate?
- it is the percentage increase in purchasing power that the borrower pays to the lender.
- It is adjusted for inflation
- Formula for real interest rate:
- Real = nominal interest rate - expected inflation
What is nominal interest rates?
- It is the percentage increase in money that the borrower pays back to the lender.
- It does not adjust for inflation.
Who is hurt and who is helped by inflation?
- Hurt by inflation:
- Lenders people who lends money at fixed interest rate
- People with fixed incomes
- Savers
Who is helped by inflation?
- Helped by inflation:
- Borrowers people who borrow money.
- A business where this price of the product increases faster than the price of resources.
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